The days are getting longer, spring training has begun, government stimulus is in the air, and it seems like thaw is beginning to crack the home building market. Several reports of late indicate that we may be nearing the bottom of the housing downturn. It’s nearly spring—allow me to wax optimistic for a while.
Lest we forget, builders traditionally do 40 percent of their yearly sales from March through June, so business may seem a little better as spring rolls around. As the school year draws to a close, families put in place plans to move to a better school district or get a bigger house to support a second kid. Empty-nesters contemplate that next move to a home that better fits their lifestyle. Hip model centers coax apartment dwellers into taking the homeownership plunge.
Some of these demographic dynamics, as predictable as migration, are already blooming. Surveys of builders reported surprising increases in buyer traffic during the first two months of the year. Prospects came out to see what they could get with today’s lower prices, new models, additional incentives, and lower mortgage rates. New homes haven’t been this affordable since 2003.
First-time buyers have an added incentive to buy this year. They can qualify for the $8,000 tax credit. And everyone who can make the down payment can qualify for 30-year, fixed rate mortgages that, as of mid-February, are down a point and a half from July. Who knows how long that will last.
The tax credit, though it may not be as big as home builders would have liked, certainly takes away some of the downside risk to buying a home today. Economists at Moody’s Economy.com expect price declines to bottom out at a 36 percent fall from the peak, which means we only have another 11 percent to go. They expect the market on a national basis to hit bottom in the fourth quarter of the year, setting the stage for a housing recovery next year.
“The market’s correction to date has been substantial, wringing out many of the excesses that precipitated the crash,” Moody’s Mark Zandi and crew write, noting that existing-home prices have returned to 2004 levels. “More than three years since the market began correcting, inventories are flattening, prices are coming back down to earth, and sales are approaching stability.” Some markets will undoubtedly recover before others. Builder, with the help of Hanley Wood Market Intelligence, recently analyzed the strongest and weakest among the 75 major home building markets. Five of the healthiest were in Texas cities that added jobs last year and experienced very little depreciation in home prices, if any. Several markets in the Carolinas, Fayetteville, Ark., Indianapolis, and Nashville, Tenn., also made the list of the 15 strongest markets, which tended to be places where pricing didn’t get out of control during the housing boom. You can find the list at BuilderOnline.com.
The new economic stimulus package is so large, at nearly $800 billion, it will undoubtedly stimulate economic activity and job creation. New government initiatives to take bad assets off bank balance sheets may help get capital flowing. And if recently announced efforts to stem the foreclosure crisis actually work, the government will have dealt with the major impediments to a housing recovery.
These new government efforts come at a time when the home building market appears to be “self-correcting.” Mortgage rates, with some help from the Federal Reserve Board, have dropped to highly affordable levels, home prices have fallen to where most households can afford to buy a new home, and the industry has cut back dramatically on new-home supply. If the housing market does rebound soon, it may be hard to identify the root cause.
The big question, of course, is whether the accumulating list of positives will outweigh the drag from a recession that appears deeper than most economists expected. Don’t forget, though, that new-home sales have managed to grow during economic recessions before. Let’s hope the industry can come through in the clutch again and perform its time-honored role of lifting the economy out of recession.
Learn more about markets featured in this article: Indianapolis, IN.