I am always excited when I get the opportunity to tackle a new topic with my writing skills. This is my first article on the subject of the economy. During the December 2011 Housing Forecast Breakfast, I listened to various speakers and questions from the audience. This article ran in the January 2012 issue of the Home Building News (HBN). You can also see it online here. Please note that I am not only the editor of the HBN, I am a contributing writer even though I don’t get the by line.
Improving market on the horizon, housing experts explain recovery
Promising outlook presented at annual Housing Forecast Breakfast
by Home Builders Association of Metropolitan Portland
With nearly 400 housing professionals and elected officials in attendance at the annual Housing Forecast Breakfast on December 14, 2012, HBA’s largest audience in four years was eager to hear the outlook. Three industry experts gave us a peek at the economic horizon: Slow growth is expected in 2012.
National Economist Perspective
“The worst is behind us,” said Robert Denk, Assistant VP for Forecasting and Analysis at the National Association of Home Builders. But there is still “a lot of uncertainty,” said Denk. The high unemployment rate coupled with the sluggish growth of GDP contributes to a low level of confidence among Americans. Denk pointed out that of the eight recessions in the last 50 years, the current one comes in second to last in the speed of recovery. The economy is just “bouncing along the bottom, stuck in a holding pattern,” added Denk.
Denk uses the level of production between 2000-2003 as the standard for “normal”. According to his calculations, the national average for single-family housing starts bottomed at 28% of “normal” production. He indicates that all four measurements of housing prices (Case-Shiller, FHFA, NAR, and Flow of Funds), although not NASA precise, tell the same story (see graph A). According to Denk, the national average on single family starts has grown to 42% of “normal” indicating that we are on our way back. However, Oregon will be one of the slower states to recover.
When comparing median house price to median income, “price declines are over.” At the peak of the recession, price/income ratio topped at 4.7 and now has stabilized at 3.2. Price to income ratio represents the ratio of the median house price compared to the median annual income for a region. For example, if the median home price is $250,000 and the median annual income is $50,000, then the price/income ratio is 5.0. A price/income ratio of 3.2 is considered normal, and many economists felt that until a region’s ratio got down to 3.2, the area would still have problems.
When it comes to foreclosures, Denk made a distinction between “problem” versus “crisis”. In some states (mostly the southwest, Florida, and the rust belt), foreclosures grew to 6 times pre-recession average. The national average, however, “only” doubled, growing from .5% to 1% at its peak. Oregon is hovering right at the national average of 1%, which means that while we’re not as bad as a few of the worst states, foreclosures still will play an impact in our recovery (see graph B). Denk uses graphs C and D to illustrate the rate of recovery in 2012 and 2013.
Regional Land Supply Analysis
Taking a different perspective, analyst Todd Britsch of New Home Trends talked about the availability of lots and land. Currently, 10% of plats in the pipeline do not have a lender associated. “The odds are a majority will go back to the bank,” said Britsch.
When the market turns, Britsch doesn’t see the likelihood that larger banks will be the first to begin to loan on vertical development. He predicts smaller regional banks and private lenders will make money available first. National builders and local builders who survived the downturn will continue to build.
“We need first time home buyers back in the market. It fuels the step up buyer,” emphasized Britsch.
With 11,357 foreclosures in the four county (Clark, Clackamas, Multnomah, and Washington) area in 2011, the perception has been “the banks did this to me.” But Britsch noted when rent rates go up, it fuels housing starts. He pointed out it’s now “less expensive to own today than rent,” as vacancy rates have decreased and rents are starting to rise. These are also positive indicators for a housing recovery.
Britsch doesn’t believe unemployment is a major positive factor until it is down to 5%, as recent drops are also a result of some people just not looking for jobs anymore. He believes a better barometer is the number of people employed along with net jobs added, and he sees a slight increase in the number of people holding jobs (see graph E).
Finally, Britsch also noted that there is a perception that the cost of new homes has come down. The reality, he said, is that builders have had to decrease amenities in new homes to be competitive with the existing home market, so that has given the appearance of price declines. As the market recovers, builders are likely to begin adding amenities back in as well as building larger homes that the market will demand again.
Local Sales Market Impacts
Ken Perry, President and CEO of Knowledge Group, emphasized “we have a perception problem in the US.” If there is no social problem to giving your house back, you will give your house back,” he said. “What that means is there are a lot of people who gave their house bank to the bank in 2008 and 2009 because it simply didn’t make sense to keep it.” The good news, said Perry, “Once someone has tasted the sweet nectar of home ownership, they want to own again.” It will only take those who lost their homes 2 or 3 years to get back into another mortgage because most people kept their credit scores high buy paying on their credit cards instead of their mortgages. Perry believes this buying group, along with all those who delayed forming households during the recession, will cause a high demand for housing in 2-3 years.
Perry also stated that we’re at a point where much of the public perceptions of the economy and the housing market are driven by their conversations with others. Perry’s solution? The CPCI – Christmas Party Conversation Index. When you talk down about the industry, the listener will go to the next party and repeat those words: “Business sucks. It’s a bad market out there.” When you talk positive, the positivity spreads.
It should be noted that Perry is not a blind optimist. When he spoke at the HBA Housing Forecast breakfast in 2008, Perry said our industry just finished the biggest party of its life (the housing market boom) and was now waking up with the worst hangover it had ever experienced. At that time (2008), he believed the hangover would last a few more years. Due to his track record, Perry’s optimism about slow growth in 2012 followed by rising growth in 2013 has credibility.
These three industry experts, all coming from different perspectives, are giving us cautious but growing optimism for the housing market recovery. So, think about how you can spread the word at your next social event: “The economy is growing – slowly but surely.”