Happier news about home sales and other market fundamentals have buoyed builders’ hopes all summer. Yet, as the housing industry sighed with relief at the better numbers, questions still lingered in our minds:
Is this real? If so, how long will it last? Could there be another fall to come? In short, what will the path to recovery look like?
There’s been no shortage of speculation. In the best-case scenario, the economic recovery will be shaped like a 'V,' improving as dramatically as it declined. Less ideal, but still hopeful, is the U-shaped theory, with the market bouncing on the bottom before heading back up. Heaven forbid it’s an L-shape, with the market hitting bottom and then continuing on a straight path with no upward movement in sight.
Economists, analysts, and others who closely track the numbers that would indicate recovery, seem to think it will be more complicated than any of those scenarios. A W-shaped recovery, tilted on its side with the last upward slant trailing off to the right seems to be the common consensus for the shape of the recovery. But there is a number of variations on the appearance--and associated economic activity--of that letter 'W.'
Mark Vitner, senior economist for Wells Fargo Investments, believes the W-shaped recovery "will be sort of like you’re writing in cursive." Thanks to the bounce provided by the government stimulus, including the first-time buyer tax credit, “we are going to pop up pretty quickly,” Vitner said. “The housing market is going to get a nice little bump in the third quarter” just before the credit expires Nov. 30.
“We’ll be giving it back later in the year,” predicted Vitner, indicating the third (and downward) slant of the 'W.' “The good news is we’ve seen the bottom and we are not going to retest the bottom in single-family home sales and starts. The bad news is that we are still at levels that are close to record lows.”
From that second bottom, sales should start to improve slowly, forming the beginning of the W’s fourth slant, but they will move to the side as they move up before settling into a new “normal” that is well below where the 'W' started. “We are not going to return to conditions that builders are going to characterize as strong,” Vinter said. He doesn’t expect the home building market to return to normal or strong until the last half of 2011.
Foreclosures moving into the market could slow things. “I will be happy when we’ve gotten to the end of it,” he said. While the moratoriums slowed the rate of foreclosures coming on the market they also have prolonged the recovery.
After that hit, Vitner said market improvement will come from true demand, not demand spiked by loose credit markets or stymied by credit that is tight as has been the case recently. “I think we are past all the artificial stuff,” he said.
Others predict a slightly different shape for the W-recovery. Roger Tutterow, professor of economics for Mercer University in Atlanta, suggests that the recovery will look like a 'W' “with the second 'V' leaning toward the right.”
“The good news is that I think there is some evidence that the carnage is moderating, if you would,” Tutterow said. “I think the most likely scenario is that the absorption rate for housing bottomed out earlier this year, and that over the next several quarters, there will be modest improvement in terms of absorption rates.”
Then the market will start to make the next downward stroke on the 'W' as stimulus stops, banks put more foreclosed homes on the market, and consumers, who have pulled their homes off of the market, re-list them.
The sale of some of that shadow inventory would be good news for builders because it will unlock the now restrained move-up market, Tutterow said.
But builders shouldn’t expect the market to get anywhere close to the peak for years, he said. “They should aim for 25% to 35%,” according to Tutterow. “As much as we would all like to get in the game of building new homes and trying to build our way out of pressures, we have to be patient. One of the worst things we could do now is to dump a lot of new product on the market.”
Housing experts agree on the W-recovery, but they have their own ideas about how it will look within that framework.
“A W linked with a straight line,” is how David I. Goldberg, an analyst with UBS Investment Bank, sees the shape of the recovery. “It doesn’t rise very quickly (on the end). Once we put in a bottom, we are not going to see 10% price increases. Volume (of sales) will increase faster than prices increase.”
The steepness of the increase will depend on a number of factors, according to Goldberg, "including the government tax credit, mortgage liquidity, and FHA and its liquidity.”
John Burns of John Burns Real Estate Consulting is also forecasting a W, though it’s clearly a wide, stylized shape.
The first slant up in his 'W' is driven by affordability, compared to rent costs, the $8,000 tax credit, government-backed lending programs, and positive media reports about rising median home prices, according to a recent report. After Nov. 30, though, Burns expects the line will start trending south again because all those stimulus factors pulled demand forward into 2009 from 2010.
When the market begins to improve, it will be a shallow slope, according to Burns' research. “Looking to the future, rising mortgage rates without accompanying wage inflation, high foreclosure activity through 2012 and a pullback in government stimulus will prevent substantial price appreciation.”
Teresa Burney is a senior editor for BIG BUILDER and BUILDER magazines.
Learn more about markets featured in this article: Atlanta, GA.