Last spring, we tried to forecast what would happen in the new housing market, as that market directly impacts retail development. Overall, the expectations were not positive. Unfortunately, those expectations were essentially met, and although the situation is improving, recovery is not proceeding as well as had been hoped.
The meltdown in the subprime credit markets that defined 2008, which decimated the home-buying market in 2009 as well, will continue to have an impact in 2010, as many homebuyers are unable to obtain reasonably priced financing unless they have superior credit. Further, what financing is available often is primarily due to various governmental incentive programs (many of which were described in last year’s article). This lack of affordable financing continues to detrimentally impact the new home-building market, as the number of housing starts, which had been on an increasing pace for six months in the middle of the year, faltered when the incentives were anticipated to expire. Although the incentives were extended to March 31, 2010, such programs will not be extended indefinitely, and may not get extended again for a variety of reasons, so it would not be prudent to expect continued governmental activity to cure what ails the housing market. In addition, homebuilders are unable to obtain favorable financing, since there are far fewer buyers for their product, due to the huge increase in foreclosures (see discussion below) and thus many alternative excellent deals to be had for well-qualified homebuyers.
Two new governmental programs that may impact new home construction were announced in mid-January 2010. First, the U.S. Department of Housing and Urban Development (HUD) announced that it would expand access to mortgage insurance issued by the Federal Housing Authority (FHA) and allow for quick resale of foreclosed properties. Current rules prevent a homeowner from obtaining FHA insurance on a home owned less than 90 days, but this restriction was lifted effective February 1, 2010 and will continue for one year (certain conditions and guidelines will have to be met). Second, HUD stated that it was allocating $2 billion in grants to communities and non-profit housing developers to combat the effects of vacant and abandoned homes on neighborhoods. While both of these actions could have the short term effect of reducing the pool of home buyers (who might otherwise look at new housing) due to easier credit for foreclosed properties, in the long run (hopefully not too long), they should help the new housing market by clearing the excess of foreclosed homes from the market and incentivizing homeowners to again look at new housing.
In any event, whatever improvement has occurred in the housing market does not appear to have been enough to jump start new residential construction, with the result that virtually no new shopping centers are currently being developed in California since there are no new rooftops to justify new retail development.
As noted last year, the southwestern portion of the country (California, Arizona and Nevada) were at the forefront of the debacle. Housing starts in California’s Inland Empire and Central Valley plummeted in 2009 and the beginning of 2010, and the forecast for the rest of the year is not very good. Further illustrations of the dire condition of the new home building market include: single-family housing starts in December 2009 in the western U.S. declined 41% from December 2008, while new housing under construction in December 2009 in the western U.S. declined 32% over December 2008. And in Los Angeles, County, by far the most heavily populated county in the country, residential construction in December 2009, although up 37% over November 2009, was still down 6% over December 2008. However, some housing market indicators are up, such as new housing starts in the western U.S., with a 15% increase from December 2008 to December 2009, although new housing starts in December 2009 were down 10% from November 2009. The numbers for multi-family product are not much different, at times even worse. Applications for building permits have similarly dropped.
Unfortunately, dramatic increases in home foreclosures continue to create a drag on new housing, as people are forced to leave their homes, thus opening up existing, and often more centrally located, alternatives to new home buyers. Examples of where this is occurring in California include Stockton, Modesto and Riverside-San Bernardino, which have the dubious distinctions of being the second, third and fourth most foreclosed upon regions in the U.S. in the third quarter of 2009 (Las Vegas being the first). The continuing softness in the labor market also undoubtedly contributes to the lack of interest by potential new home buyers, who are anxious about taking such a significant step (as has been noted many times, a home is often the largest single investment most families make in their lives) when their own employment situation may be in jeopardy.
As noted last year, there were large inventories of completed new housing and under-construction housing in the former boom areas of California when the housing market collapsed. Due to the lackluster performance of the housing market in 2009, these inventories remain, and although they will be a disincentive to additional new housing projects (those that may be entitled, and perhaps even permitted) for some time, their mere existence should eventually lead to new retail development in those former boom areas once the housing market recovers, since the investment in development and infrastructure is probably too significant to abandon, whether by the original developer, or others with available cash or who can obtain financing on favorable terms and who are able to obtain good prices for the existing finished or near finished product.
Further, one of the few bright spots throughout the downturn has been urban infill, which is expected to see continuing growth based on the push for “smarter” and “green” development, and homebuilders and retail developers would be wise to begin adapting to the denser developments that characterize this trend.
As this article shows, the statistics regarding the housing market are mixed, so it is not surprising that the “experts” are not in agreement about when the housing market will fully rebound – some think that the bottom will occur in 2010, while others think it could be somewhat later before things get markedly better. The most likely story for the remainder of 2010 is more of the same – signs of improvement, followed by small setbacks (two steps forward, one step back).