Home builders can expect market to return to 2001 to 2005 levels

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Home prices will continue to decline, reversing the last several years of price appreciation, says John Burns.

October 10, 2008

When we tell our clients that we expect prices to revert to 2002 or 2004 levels in many markets, they nod in agreement. When we tell them that we expect prices in their market to fall 30 percent, 40 percent or 50 percent, they think we are crazy. It is the same thing.

We are forecasting a reversion to price levels of 2001 to 2005, varying by market as shown in the tables shown below that lists 20 of the largest housing markets in the country. Prices should not fall as dramatically in Texas, where the economy remains strong but new home oversupply and excessive subprime lending have wreaked havoc. Where almost everything went wrong — and where the economies are currently shedding jobs — such as in California, Arizona, Florida and Nevada, the price corrections will be much more severe.

Location. Location. Location. Even more importantly to housing's giants, however, is that the degree of decline and the timing of the recovery will be more dependent on the location within the metro area, rather than the metro area itself. The most desirable neighborhoods in the best school districts and near employment centers seem to be faring much better than other areas. Due to demographics, we favor locations in excellent high school districts.

We made these projections before the Freddie and Fannie takeovers were announced, creating a significant decline in mortgage rates. If the federal government, which now controls the nation's mortgage industry, continues to allow the agencies to buy mortgages at high LTVs and relatively low FICOs, the market will rebound quicker than we anticipate. While the press will focus on the mortgage rate, you should focus on the LTVs and the credit requirements.

Conclusion Pull out your records from 2002 to 2004 to remind yourself of how homes were priced in those years. They weren't that long ago. Assume that buyer incomes have grown about 3% per year since then to help you determine where prices should be today. Be patient with new acquisitions and do your homework. Great land buys are coming your way. It just takes time for the sellers to come to grips with 2002 – 2004 pricing.

City 12-month SF Permits 12-month SF Growth 12-month Total Permits Total Permits / Peak Permits 1-year Payroll Employment Growth 1-year Growth Rate Unemploy-ment Rate Median Detached Resale Home Price
Houston 34,631 -30% 52,665 70% 54,100 2.1% 4.7% $161,300
Atlanta 20,169 -53% 29,680 40% 18,100 0.7% 5.9% $153,911
Phoenix 17,178 -50% 28,056 38% -25,900 -1.4% 4.3% $205,000
Dallas 15,191 -35% 29,113 39% 40,900 2.0% 4.8% $168,700
Charlotte 11,077 -41% 16,504 66% 17,800 2.1% 6.3% $170,000
Raleigh-Cary 9,980 -23% 13,757 78% 13,800 2.7% 5.0% $206,000
Austin 9,861 -32% 19,054 72% 13,900 1.8% 4.2% $196,900
Chicago 9,108 -48% 20,518 47% -800 0.0% 7.3% $235,000
Washington, D.C. 8,795 -36% 14,319 38% 23,700 1.0% 4.0% $344,898
Fort Worth 8,667 -30% 12,949 34% 16,900 1.9% 4.7% $119,800
Riverside / San Bernardino 8,629 -62% 13,093 23% -25,800 -2.0% 8.0% $250,000
Las Vegas 8,017 -49% 20,576 52% -6,200 -0.7% 6.5% $225,000
Orlando 7,753 -54% 14,988 42% 0

0.0%

5.3% $210,000
Nashville 7,728 -40% 9,821 54% 6,300 0.8% 5.8% $169,950
San Antonio 7,324 -36% 12,059 54% 16,700 2.0% 4.6% $158,600
Seattle 6,541 -36% 18,008 65% 21,500 1.5% 4.0% $418,000
St. Louis 6,204 -31% 7,584 41% -7,400 -0.5% 6.5% $185,710
Portland 6,019 -34% 9,888 50% 4,800 0.5% 5.3% $280,000
Tampa 5,860 -46% 9,664 26% -23,100 -1.8% 5.9% $165,000
Jacksonville 5,825 -30% 8,523 34% -3,800 -0.6% 5.6% $185,000
Data on all markets available at www.realestateconsulting.com. Sources: John Burns Real Estate Consulting, U.S. Bureau of Labor Statistics, U.S. Census Bureau through the month ending June 2008


City Expected Trough Peak Trough Decline Reversion Date Equivalant
Houston 2010 -14% 2005
Atlanta 2011 -19% 2001
Phoenix 2011 -44% 2002
Dallas 2010 -15% 2002
Charlotte 2010 -18% 2001
Raleigh-Cary 2011 -21% 2002
Austin 2010 -13% 2006
Chicago 2011 -22% 2003
Washington, D.C. 2011 -38% 2003
Fort Worth 2010 -16% 2004
Riverside - San Bernardino 2011 -55% 2002
Las Vegas 2011

-46%

2003
Orlando 2011 -33% 2004
Nashville 2011 -20% 2005
San Antonio 2011 -19% 2005
Seattle 2011 -25% 2005
St. Louis 2012 -24% 2005
Portland 2011 -21% 2005
Tampa 2010 -32% 2004
Jacksonville 2010 -29% 2004
Sources: John Burns Real EstateConsulting, DataQuick, Economy.com, Texas A&M

John Burns helps many of the largest companies in the industry with strategy and monitoring market conditions. He can be reached at jburns@realestateconsulting.com.

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