A year ago, the home building industry was searching for the next big thing in terms of marketplaces. The industry was basking in the afterglow of a once sizzling market, confident that most markets would remain stable even if the main metrics slid off their peaks.

The industry was wrong. And builders everywhere felt the bad news hit them like a sucker punch—hard and fast and seemingly out of nowhere. Today, there's hardly a market out there that could be considered hot, much less lukewarm. Sales are depressed and cancellations are soaring. Unsold home inventories have climbed to record heights, forcing builders to halt the hammers until they can work through the standing stock.

But how long until business is back on track? Margaret Whelan, an UBS Investment Bank analyst, argues that inventories are swollen less because sales paces have slowed and more because the industry spent the past three years overbuilding in relation to housing needs. At an investor conference in early November, Whelan suggested that builders best not hold their collective breath for the market to turnaround in the next year, because it's likely to take a heck of a lot longer to rebound.

She said, “My part of [this presentation] was really to understand what demand is for housing, by how much we overbuilt for the last three years, and when that's going to change. So, the conclusion is that, yes, we do need 2 million new houses a year and, yes, we did overbuild for the last three years by a total of about a million that needs to be wiped out of the system. And we estimate it will take three years to do so.”

That sort of thinking permeates this year's annual BIG BUILDER market forecast. Today's downturn exacerbates the need for not only more but better insight into the future. Working with Hanley Wood Market Intelligence, we've striven to provide you with a more complete picture of the markets in which you operate. Our Market Watch 2007 gives you a snapshot of what's happening in your markets today, what you can expect in the next year, and most important, what will the landscape look like in the longer term once the inventories clear out.

METHODOLOGY The Market Watch 2007 forecast is culled from Hanley Wood Market Intelligence data on the 50 largest home building markets, as defined by the number of permits. Within each of those markets, we looked at the demand/supply ratio in comparison with the housing growth number, or the number of permits per 1,000 people. Based on this indication of how strong demand is relative to how fast homes are coming online, four outlook trends emerge. (See “Forecast Key,” right.)

A demand/supply ratio of 1.0 indicates equilibrium, meaning that housing is in line with job growth. Numbers in red indicate a projected decrease in 2007, while green numbers signal a projected increase. Blue numbers show a stable trend.

Positive Long-term Outlook Although today these markets are struggling against challenging conditions, they are the industry's future cash cows. The pace of residential construction is in balance with job creation, population growth, and economic opportunity.

Opportunity for Future Growth These markets' slow pace of permitting relative to their healthy housing demand suggests there's an unmet need for homes. However, builders may have to invest in new product to fit some of these market's land constraints. Infill anyone?

Watch for Oversupply With permits being cranked out at a high volume, these markets are in jeopardy of being overbuilt down the road. Home builders should be looking to keep their unit production in line with the underlying market fundamentals.

Download the entire Market Watch 2007 Report. [PDF]