A look at what caused the downturn and where we will be in the near future

The status of the U.S. housing marketing has made headlines across the globe. First it was the news of record-breaking highs of single-family home starts, price appreciation and new home sales, then it hastily reversed with front page stories dictating the excess inventory of unsold homes and foreclosures.

So, what really caused the slump, and how do we, as a nation, bounce back from the storm?

Key factors of the housing decline
According to the chief economist at Reed Construction Data, Jim Haughey, in his Housing Outlook Summary (September 2007), the two central causes of the housing recession was overly aggressive mortgage lending and slow and costly development permitting. Starts will only begin to stabilize when the amount of surplus declines and they will only expand when the surplus falls below 2,000,000. In addition, a housing rebound vastly depends on the state of the economy, interest rates and credit availability.
Harvard University’s Joint Center for Housing Studies’ “State of the Nation’s Housing 2007” report mirrored this same conclusion, maintaining that housing affordability continues to be a problem. State and local governments must ease development regulations that force high production costs, while economic growth must dramatically shift the incomes and wealth of the bottom quarter of households to avoid foreclosures. What’s even more disturbing is the Harvard study’s position that even fully phased in, the new federal minimum wage would not [even] cover today’s rent on a modest apartment. The economy is a sure-fire indicator of what’s to develop in terms of the housing market.

Slow growth over the next two years
When will we see a rising housing market? Well, it surely won’t be tomorrow. Home prices are only beginning to soften, loans at risk are just commencing to hit their reset dates, and credit standards have tightened. Experts maintain that we will not see any positive growth until at least mid-2008. Until that point, there will be modest growth or stabilization, but nothing significant enough to take us out of the recession.

Haughey points out that surplus inventory of new and existing homes keeps housing starts below the demographic trend beyond 2009. He also speculates that below market rate mortgage buying may worsen, home prices are expected to drop another 4-6%, and mortgage rates will continue to be sorted out by financial and real estate markets, resulting in higher costs and reduced demand throughout the economy, but, housing affordability is predicted to improve from average to average plus. He believes the 2008/2009 economic environments will emulate a slow growth housing market.

Here are some key points as to why:
World GDP growth stays near record high maintaining pressure on commodity prices
U.S. GDP growth rises from 0.6% to near 3.0% in 2009
Consumer confidence rises from average to average plus
Credit rates remain steady possibly down slightly
Loan approval standards tighten for marginal borrowers
Overall inflation rate steady at about 2.5%
Job growth slows but wage rate increases

There is some good news!
The total housing starts are expected to grow from 1,373,000 in 2007 to 1,378,000 in 2008 and 1,574,000 in 2009. Single family homes show a decrease in 2008, from 1,077,000 in 2007 to 1,059,000 in 2008, yet show signs of growth in 2009 with a forecasted 1,231,000. Multi-family homes show modest increases in both 2008 and 2009, along with homes located in the Northeast and Midwest. Only the South and West show decreases in 2008, but both areas are expected to increase in 2009. In addition, remodeling spending will be up slightly throughout 2008: about 5-6% throughout the course of 2008.

We achieve greatness again
The housing market will eventually recover; the increased demand for new construction and remodeling will ultimately return with the trends in immigration and the aging of the boomers and Generation Y. Within the next 10 years, the Boomers will continue to define the trend in second homes, while Generation Y will move into its prime homeownership years. With all these factors in tact, new home demand should total about 19.5 million units from 2005 to 2014, and new home completions plus manufactured home placements should easily surpass the 18.1 million added in 1995 2004, according to the Harvard study.

2008 brings hope
Whether you’re a builder, remodeler, manufacturer of home-related products, or a home industry marketing specialist, there’s no doubt that this housing slump has hit hard. But what’s inspiring is our nation’s ability to weather the storm. 2007 has been a challenging year, but with 2008 upon us, it’s time to regain our fervor and set the rebuilding process in motion.
Check out next week’s blog regarding the regional outlook of the housing market.