This is the third year we have attempted to forecast what the new housing market will do, since new retail development will not recover until construction of new housing and sales of existing new housing resumes. The outlook last year was mixed, and unfortunately the results bore out the predictions, as the new housing market remained in an up and down pattern of promising spurts of growth followed by frustrating contractions. For example, while nationally December 2010 new home sales increased 17.5% over November 2010, they still were down 7.6% from December 2009, and new housing starts decreased 4.3% from November to December of this year.
The subprime credit disaster continues to impact new housing, as potential homebuyers often remain unable to obtain reasonable financing, due in part to the conservative lending standards that have prevailed for the last several years, and in part to the expiration of the federal government’s program that offered first time homebuyers an $8,000 tax credit. This program required a taxpayer to enter into a contract for purchase by April 30, 2010, and close on such purchase by September 30, 2010. As expected, upon expiration of that program, home sales, which had been on an upswing in the beginning of 2010, immediately dropped.
There appear to be only two significant governmental assistance programs on the horizon. The first is the Federal Reserve Bank’s announcement earlier this year that it intends to continue to hold interest rates at record low levels and to purchase up to $600 Billion in U.S. Treasury bonds by the end of June 2011, the goal being to encourage consumer spending and raise stock prices (in addition to keeping interest rates low). However, considering that ultra low interest rates have been in effect since December 2008, it does not appear that this will, in and of itself, pull new housing out of its slump. The second is a $2 Billion program recently announced by the California state government to fend off foreclosures for about 95,000 homeowners, using federal funds reserved for the fiscal crisis. This program is still in its infancy, but does have the potential to provide some boost to California’s housing market.
Furthermore, homebuilders remain pessimistic. According to Builder magazine’s January 2011 issue’s “State of the Industry” survey, at the end of 2010 only 14% of homebuilders thought conditions were improving, while 45% said that conditions were still deteriorating. While this was slightly better than in 2009 and substantially better than in 2008, the pessimism remains at historically high levels. In looking at 2011, the survey showed that over 25% of homebuilders thought that matters would continue to deteriorate, while over 35% felt that things would remain stable, not good considering that “stable” refers to the low level of activity experienced during the past few years. A major contributor to their concern is that homebuilders also continue to be hampered in their efforts to obtain financing, with around 20% being unable to get financing on any terms, and another 25% having difficulty obtaining loans on terms that they were used to getting.
Nationally, 2010 turned out to be the worst year for new home purchases since 1963, dropping over 14% from 2009. Other indicators of the depressed state of the new home building market include: the U.S. Commerce Department recorded a decrease in nationwide housing starts from December 2009 to December 2010 of about 8%, while the National Association of Realtors (“NAR”) index showed the number of houses (new and previously owned) sold nationwide dropped to its lowest level in 13 years and that contracts for buying previously owned homes in the western U.S. declined 13.2% in December 2010 over the previous month. Even positive news, such as the fact that according to the NAR signed contracts to purchase homes rose in December 2010 by 2% over November 2010, which marked the 5th increase in the past six months, that number was still down 4.2% from December 2009. The NAR also reported that previously owned home sales rose 12.3% in December 2010 over November 2010, but this still was 2.9% less than December 2009.
Housing prices continue to plague the new housing market. As in the last two years, California leads the way in bad news. A recent study based on the Federal Housing Finance Agency’s house price index showed that of the 32 metropolitan areas in the United States with the largest housing price declines over the last three years, eight of the top 14, and 18 overall, were in California, primarily in the Central Valley and the Inland Empire (the 1st, 2nd, 3rd, 9th, 10th, 12th and 14th largest declines), averaging a drop of almost 60%. California’s largest urban centers also suffered, with Oakland, San Diego, Los Angeles and Orange County (registering 21st, 22nd, 23rd and 26th, respectively) averaging a drop of almost 35% (San Francisco managed to avoid the list). However, there exists some good news in these otherwise gloomy statistics, as the statewide decline for 2010 was just under 4%, meaning that the bulk of the decreases appear to have already taken place. Nonetheless, many economists expect that home prices will continue to decline through the first six months of 2011. So long as housing prices remain that depressed, there will be little incentive to commence building new homes.
In addition, foreclosures remain a major obstacle to new housing. In 2010, over two-thirds of the country’s largest metropolitan areas had increased foreclosure activity, and the prognosis for 2011 is that it will see the highest volume of foreclosures yet, with one analyst predicting an increase of 20% in foreclosures over 2010. And while some areas of California saw reductions in foreclosures, this was partly due to lenders having to slow down the process due to the high volume, which in some situations was leading to court challenges that typical borrower protections were not being followed. As lenders address and resolve these issues, however, they are expected to ramp up foreclosures. A minor bright spot here is that the percentage of previously owned home sales based on foreclosures decreased almost 3% from December 2010 over December 2009, to about 38%, and is well off the record all-time high of almost 59% in February 2009.
In addition, short sales (where a borrower, with the lender’s consent, sells its house for less than the amount needed to pay off the loan) seem to be on the increase, which, while perhaps better than foreclosures, represent another alternative to new homes. Also contributing to the lackluster sales of homes is the fact that many potential homebuyers are waiting to see if prices fall still further, so they can get the very best deal available. Until the home price slide ends, this waiting game will continue to contribute to a delay in the recovery of the new housing market.
The employment picture is now seen as the primary reason for foreclosures, as compared to the concern during the past few years of resetting of interest rates in adjustable rate mortgages to much higher rates. Job losses are making it difficult to stay in homes which often are worth less than the mortgage debt on them, and the length of unemployment has in many cases exhausted homeowners’ savings and ability to ride out the bad times. The employment picture also affects new home purchases, as potential purchasers are leery of taking such a major step when they are uncertain whether they will have a job to support long term monthly mortgage payments. While the unemployment rate has improved somewhat over the past year, it is but still at 9.0% nationally, somewhat higher in California. Thus, consumer confidence, a critical component of economic growth, remains at levels which do not suggest large improvements in spending in the near future, particularly on such a major family asset such as a home. The employment issue in California is further exacerbated by the continuing California budget crisis, which has paralyzed the state and local governments, with companies being cautious in their investment in California until it becomes clearer that the state can get a handle on its finances.
Finally, the large inventory of existing new housing that homebuilders were stuck with when the crash occurred continues to bedevil new housing construction. While in many areas home prices seem to be stabilizing and in some cases increasing, they are not increasing enough to justify new home construction, and as noted above, in California there simply is not much improvement at all in the housing price arena. Some experts believe that it could take years for the housing market to fully recover due to the oversupply of homes. As in previous years, there are positive and negative indicators regarding the new housing market, thus economists and industry watchers expect little progress in 2011. Although the prospects for the overall economy are generally good, it is anticipated that it will not register gains large enough to really boost the new home industry in 2011. In fact, many analysts expect that there will be a “double dip” in housing prices, due in part to the expiration of the federal government’s tax credit and in part to the continued high volume of foreclosures, which improves the availability of previously owned housing, often in better locations. Unfortunately for retail development, it does not appear that housing will lead the way in the recovery from this recession as it has in the past, but will instead be relegated to trailing the rest of the economy.