2008 in review and a look ahead

When 2008 began, the common wisdom of the day was that 2008 would prove to be a difficult year, and that builders should prepare for a market rebound sometime in 2009. However, with the world falling into recession and federal government bailouts becoming a staple of daily news, it now looks like any sustained market rebound could very well be postponed until 2010. Yet before you look for the nearest window in which to jump out of, there do remain specific opportunities for builders who are willing to conduct detailed demand studies and plan for worst-case scenarios that have the potential to improve along with the economy.

The current recession, like any others, began with a large shock to the economy – in this case, correcting a large imbalance in real estate markets nationwide. But what’s making this shock even worse is that the combination of falling prices and tighter credit is preventing people from either refinancing their way out of trouble and staying put or simply selling their homes and perhaps changing both locales and careers. Moreover, career paths once considered safe havens – such as in government, finance or media – have become just as perilous as technology, entertainment or, as many of you well know, in real estate.

If that wasn’t enough with which to contend, this same lack of credit is beginning to force a correction in a related area -- consumer spending and savings. Over the last 12 or 13 years, American households have been saving little and spending more on newer cars, larger homes and the latest in consumer gadgets. Add to that the wealth effect from rising home values and fatter stock market valuations, and it’s not hard to see why contributions to 401k accounts and savings accounts declined as household debt rose while incomes remained mostly stagnant.

Consequently we’re in what the folks at Beacon Economics have dubbed ‘the mother of all hangovers,’ which in the short-run leads to something called the ‘paradox of thrift:’ as the savings rate goes up (which is good for household budgets) the overall economy shrinks due to less overall demand. Yet in the long run, these types of economic shifts are critical for an eventual recovery better able to leverage a productive workforce, great technology and solid investments in infrastructure.

So what’s ahead for the overall U.S. economy in 2009? At this point in time, the forecast calls for mostly more hangovers with occasional sunny days in particular markets. As forecast recently by Beacon, GDP is expected to continue declining through the third quarter of 2009 as excessive demand based on debt is wrung out of the economy.

Rising unemployment rates, which are being met by calls for a second stimulus package from the nascent Obama Administration, will continue to gradually increase, peaking at 7.8% in early 2010 before dipping back down by the end of that year. Fortunately, the fear of near-term inflation will be kept in check and rise only slightly to approach 1.29% per quarter by the end of 2010, although the entire amount of various federal bail-outs of the automobile, housing and other industries will also undoubtedly impact long-term inflation rates if the Federal Reserve continues to print money.

What that likely means for the new home market in 2009 is continued turmoil, although retiring NAHB chief economist David Seiders is hopeful for a mid-year rebound. Looking at the most recent figures, although the pace of annual new home sales rose slightly in September over August levels to 464,000 units, that level is still down by one-third from a year ago and marks the lowest September numbers since 1981 (just three years ago in the boom year of 2005, 1.3 million homes were sold.)

Even as builders continue to clamp down on production in an attempt to bring down inventory levels, at current sales rates, the number of unsold single-family homes – 394,000 -- would take just over 10 months to sell. Still, at a recent semi-annual construction forecast, Seiders was hopeful that 2009 would be a rebound year and finish up with a seasonally adjusted rate of 600,000 single-family sales. Of course he is also paid to be optimistic!

One thing on which most economists agree is the important role played by new home affordability. With a median selling price of just over $218,000 in September, the sharpest spikes in regional sales have been in markets suffering the steepest price drops, and the consensus is for prices not to fall more than another 10 percent in 2009.

It’s also in those same areas that builders, who have already cut prices just about as far as they can and still remain in business, continue to compete with foreclosures, which in the West can account for as much as 40% of existing home sales. Yet as one economist presenting at the NAHB forecast concluded, builders don’t have to convince everyone to buy a new home – just some people.