2008 Housing Forecast for homebuilders

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Experts say — and data show — homebuilders will need the help of mortgage lenders, the federal government, materials manufacturers and others to make the most of a gloomy 2008.

December 01, 2007
Sidebars:
2008 Housing Starts
Housing Starts Will Modestly Grow
Home Prices Expected to Rise — Barely
Vacancy Rates Steady
Mortgage Gloom — and Rates — to Rise
Homeowners of the future
Materials prices will likely fall before creeping back up

There are just more than 5 million homes for sale in the United States, about the same number of housing units in Illinois. So to visualize the devastation across the country: imagine a "For Sale" sign in front of every single-family home, every townhouse, every condo, every multi-family residential building in the entire state.

It's a horrifying thought, but now imagine this: every single home in the greater Detroit metro area is sitting empty because everyone has moved away. The 2.08 million households in the Motor City, including areas such as Ann Arbor and Flint, equate in number to the 2.07 million vacant homes for sale across the United States, according to data from the U.S. Census Bureau and the National Association of Realtors.

The length and depth of this correction, say experts at Harvard University's Joint Center for Housing Studies, will depend on the course of employment growth, interest rates, as well as the speed with which builders pare down excess supply.

Builders are already chipping away on their end by offering deep discounts and price reductions on the homes they have already built, as well as by decreasing housing starts. By the end of 2006, housing starts had dropped to 1.8 million, which is the lowest they had been since before 2003. For 2007, housing starts fell to a seasonally adjusted annual rate of 1.19 million units, the slowest since March 1993's pace of 1.08 million units, reports the NAHB. Single-family production registered a 1.7 percent decline to a 963,000-unit rate. Starts will continue to decrease in most U.S. regions in 2008 and then begin upward by third quarter 2008 and first quarter 2009, according to NAHB.

"Builders are working their problems down," says James Haughey, chief economist for Reed Construction Data. He adds, however, that it takes more than slowing housing starts to reverse the downturn in the U.S. housing market. Dropped housing prices are another way in which builders are playing a part to change the downward spiral of the housing market.

Whether it's homes, oil or even Beanie Babies, prices rise on items when demand exceeds supply and prices fall when supply exceeds demand. Given the increase in housing starts of the last few years outpaced the demand, it's no wonder home prices are declining. NAR figures show the national median existing-home price for all housing types was $211,700 in September, down 4.2 percent from September 2006 when the median was $220,900.

The problem with the dropped prices, however, is that buyers are playing a waiting game. They are hoping if they buy later rather than sooner, prices will drop even further.

To offset the drops in home prices, builders, real-estate agents and home sellers have increased the value and quantity of the incentives they are offering in an attempt to clear the inventory faster. And the incentives will keep coming in 2008, say some agents. In the Minneapolis area, one home seller is offering to give the right buyer one-week's use of her Hawaii timeshare. A suburban real-estate agent is set to give two Caribbean cruise tickets to the buyer who meets the term of his seller's contract, and Re/Max is offering to buy the existing home of any buyer who purchases one of its listings, provided the buyer gives the agent 120 days to try to sell it first.

Who the qualified buyers become will be up to the mortgage lenders, who are tightening their ropes in an attempt to do their share to correct the housing problem they helped create when they offered products such as interest-free loans and adjustable rate mortgages with no money down. Between the fourth quarter of 2005 and the fourth quarter of 2006, the share of troubled subprime loans jumped from 6.6 percent to 7.9 percent, according to Joint Center statistics.

Credit Suisse reports the amount of adjustable-rate subprime debt expected to reset by the end of 2007 and 2008 could be as much as $482 billion. Much of this will likely be either refinanced or paid off at the time of sale before the reset dates hit. For those owners who will not find relief this way, the mortgage lenders may need to come to their aid in 2008 by offering a temporary reprieve on resetting the interest rates when they come due.

Housing affordability will remain a problem in the coming years. In just one year, the number of households with housing cost burdens in excess of 30 percent of income climbed by 2.3 million, hitting a record 37.3 million in 2005, according to the Joint Center for Housing Studies "2007 State of the Nation's Housing report." Reversing this trend requires a combination of structural and public policy shifts, as well as an upswing in job growth.

On the following pages, this 2008 Housing Forecast will look at the impact several factors have had on the housing market and how they will improve — or will need to improve — going forward. We will examine mortgage-lending shifts, job growth, building materials and regional activity, as well as show how the cooperation of several entities are needed to see a brighter 2008.

 

2008 Housing Starts

We used NAHB data of single-family housing starts to calculate the percentage change from the actual 2007 starts to predicted 2008. Forecast: still gloomy. San Diego and, not surprisingly, New Orleans are set to lead, with Orlando taking the biggest hit.

Housing Starts Will Modestly Grow

Housing starts have dropped nationally from 1.8 billion units in 2006 to a newly projected 1.36 million for year-end 2007, according to NAHB data. For 2008, it is projecting an 11.9 year-over-year decline in starts for 1.2 million units.

The drop in home building was so drastic from 2005 to 2006 that it shaved a full percentage point off national economic growth in late 2006, according to the Joint Center for Housing Studies.

Single-family starts are projected to have a 50 percent decline from their first-quarter 2006 peak to the second quarter of 2008, says NAHB Chief Economist David Seiders.

"We expect housing starts to bottom in the second quarter and turn up in the third quarter," adds Bernard Markstein, senior economist and director of forecasting for NAHB. "Rebound in construction activity will be modest and slow but extended over a period of time."

Home Prices Expected to Rise — Barely

The national median existing single-family home price was $223,800 in the second quarter of 2007, down 1.5 percent from the second quarter of 2006 when the median price was $227,100. They are expected to inch back up in 2008, but just a mere 1.2 percent, according to an NAR forecast.

Most of the metro areas saw modest price declines, although four areas experienced double-digit drops.

"People do see the home prices coming down," says James Haughey, chief economist at Reed Construction Data. But part of the problem, he says, is the media focusing on "those cities that were plunging and not the other cities that were doing well. So it scares potential buyers and makes them think if they wait another month they will get a better deal. And as soon as people don't believe that anymore, prices will come up."

In the second quarter, the largest single-family home price increase was in the Salt Lake City area, where the median price of $233,100 rose 21.9 percent from a year ago. Next was Binghamton, N.Y., at $111,200, up 19.8 percent from the second quarter of 2006, followed by Salem, Ore., where the second quarter median price increased 16.7 percent to $227,900, according to NAR.

The best total sales performance was in Wyoming, where existing-home sales rose 10.8 percent from the second quarter of 2006. NAR also reports that in Iowa, the second-quarter sales pace rose 4.1 percent from a year ago, while North Dakota experienced the third strongest gain, up 2.9 percent. Oklahoma, Indiana and Nebraska also posted annual sales gains.

In the Midwest, total existing-home sales dropped 8.4 percent to a 1.39 million-unit annual level in the second quarter compared with a year ago. The median existing single-family home price in the Midwest was $163,500, down 2.2 percent from the second quarter of 2006, according to NAR.

UPSIDE
Salt Lake City, Utah 21.9%
Binghamton, N.Y. 19.8%
Salem, Ore. 16.7%
Farmington, N.M. 14.0%
Allentown, Pa. 12.8%
DOWNSIDE
Elmira, N.Y. -17.9%
Palm Bay, Fla. -15.0%
Sarasota, Fla. -11.3%
Davenport, Iowa -11.3%
Deltona, Fla. -8.3%

2008 QUARTERLY 2008 ANNUAL
Q1 Q2 Q3 Q4 2008
Median Home Prices Thousands of Dollars
Existing Home Prices 212.7 225.7 226.5 219.8 221.8
New Home Prices 252.1 242.9 238.1 243.6 243.9
Percent Change, 1 Year Ago
Existing Home Prices -0.6 0.8 2.0 2.8 1.3
New Home Prices -1.5 1.1 1.7 2.8 1.0
Source: National Association of Realtors

Vacancy Rates Steady

The 2.7 percent national vacancy rate for homeowner housing in third quarter 2007 was higher than a year prior, which was 2.5 percent, but was not statistically different than the rate second quarter 2007 (2.6 percent), the U.S. Census Bureau announced in October.

Regional homeowner vacancy rates for third quarter 2007 were lowest in the Northeast (2.0 percent) and highest in the South (3.1 percent), while those in the Midwest (2.6 percent) and the West (2.5 percent) were not statistically different from each other. When compared to a year ago, the homeowner vacancy rates by region were not statistically different from their corresponding rates.

The number of owner-occupied housing units, 75.2 million, was only slightly lower than a year ago, when it was 75.6 million.

Mortgage Gloom — and Rates — to Rise

Mortgage lenders will be tightening their purse strings further come 2008 to reverse the damage the recent rise in non-prime lending and the proliferation of alternative mortgage products caused.

Mortgage production, already down about 15 percent to $2.31 trillion in 2007 from $2.73 trillion in 2006, will decline another 18 percent in 2008 as both purchase and refinance originations drop, according to data from the Mortgage Bankers Association.

After all, the recent spike in foreclosures across the U.S. was caused in part by the extension of loan products that the borrowers did not have the capacity to repay, say experts. Consider that subprime lending soared from near-zero in the early 1990s to 8.6 percent of originations in 2001 and 20.1 percent in 2006.

Although sub-prime and alternative products will be offered at lower rates over the coming years because lenders are hoping to recoup their losses, Scott Anderson of Wells Fargo says it is also because some of the lenders most responsible for these types of loans have shut their doors.

"Of the top mortgage lenders, 35 have already closed, filed for bankruptcy or been sold," Anderson says. "Only two of the Top 10 mortgage originators left standing still hold highly risky mortgage portfolios."

Lenders will also be raising their rates slightly over the next few months. The average mortgage rate for 2007 is 6.4 percent and is expected to rise to 6.7 percent in 2008. Lenders view higher rates as a way to shut out some of the higher risk borrowers, although builders and real-estate agents would prefer to see rates come down as a way to entice buyers to enter purchasing agreements.

2008 QUARTERLY
Q1 Q2 Q3 Q4
30-Year Fixed Rate Mortgage
Interest Rates (%) 6.6 6.7 6.8 6.8
1-Year Treasury Arm
Interest Rates (%) 5.6 5.6 5.7 5.7
Source: 2007 Mortgage Bankers Association Long-term Mortgage Finance Forecast

Homeowners of the future

The third quarter 2007 home ownership rate of 50.1 percent for Hispanic homeowners is the highest it has ever been, even though the increase was not statistically different from last year's rate of 49.7 percent, according to Census numbers. At the start of 2004, the rate was around 47.3 percent. Homeownership for nearly all other segments was decreased since 2004. (Single-race Black householders are lower than a year ago with a rate of 46.7 percent. All Other Races householders, at 60.1 percent, were not statistically different from last year.)

Perhaps not so surprisingly, foreign-born home buyers, which include Hispanics as well as other races, have purchased a growing share of homes in recent years. In California, New York, New Jersey and Florida, at least 20 percent of recent home buyers are foreign-born, according to a Joint Center for Housing Studies report. Even in smaller states, such as Connecticut, Maryland and Rhode Island, immigrants account for about 14 percent of recent home buys.

Although homeownership has been flat at the national level for Non-Hispanic whites, hovering around 75 percent, homeownership for Latinos has steadily risen in the last 20 years. Just how long the upward streak will continue for Latinos will depend mostly on mortgage qualification for these borrowers. Hispanic borrowers have been disproportionately hit by predatory lending practices and failures in the subprime category, reports the National Association of Hispanic Real Estate Professionals. There were $24.8 billion in estimated foreclosures for Hispanics in 2007, and they're expected to spike in 2008 to $52 billion.

If Latinos continue to qualify for mortgages at an increased rate, Freddie Mac has forecast roughly a 3 percent annual increase in total Hispanic homeownership through 2010. "Over the next 20 years Hispanics are expected to make up 40 percent of all first-time home buyers," says Alejandro Beccera in "The Potential of Hispanic Homeownership: Challenges and Opportunities," published by NAHREP. "They are estimated to make up close to 33 percent of all home buyers by the end of this decade."

% Households, 2006
Age
Under 35 42.6
35–44 68.9
45–54 76.2
55–64 80.9
65–74 82.7
75 and over 79.1
Race/Ethnicity
White 75.8
Hispanic 49.7
Black 48.4
Asian/Other 60.8
All Minority 51.3
Region
Northeast 65.2
Midwest 72.7
South 70.5
West 64.7
Source: U.S. Census Bureau, Housing Vacancy Survey

2005 2015
Hispanic
Total 5,997 9,301
Other Minority
Total 9,957 13,210
White
Total 62,253 68,512
Source: JCHS Research Note NO 6–4, 2006

Materials prices will likely fall before creeping back up

Home building and remodeling account for two-thirds of domestic lumber consumption, according to NAHB. As housing starts drop — thus creating an increase in inventory of building supplies — it's no surprise that prices for some major home building materials have also continued to fall. In 2008, smaller price drops are likely before they creep back up, but at a slower pace, says Haughey.

Currently, gypsum products are down 22 percent from a year before, softwood lumber is down 3.8 percent and insulation materials are down 4.4 percent. The decline in September from August was 1.9 percent for roofing, 1.5 percent for gypsum products and 1 percent for softwood lumber.

"These declines were likely prompted by another round of surplus inventory and price cutting when the sub-prime mortgage problems steepened the decline in housing starts during the summer," says RCD's Haughey.

"But when you add up the costs of all materials for single-family construction, prices are up for materials 1.9 percent from the last year but unchanged for the last few months," he says. "Prior to that the total price was up about 6 percent a year."

In doing their part to correct the fall of the housing market, manufacturers are giving builders a good deal when they do have an order, says Haughey. "The problem is convincing people it is a good time to buy if you don't own a home you have to sell."

Sept. 2007 vs. Sept. 2006
Construction Commodities:
Softwood Lumber -3.8%
Other Commodities:
Construction Plastics -2.2%
Copper Ores 5.7%
Manufactured Materials
Gypsum products -22.3%
Asphalt roofing -2.5%
Sheet metal products 0.2%
Non-ferrous pipe & tube -9.4%
Building brick 1.2%
Ready-mix concrete 3.3%
Source: Compiled by Reed Construction Data

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