Retail developers locally, statewide, regionally and nationally are wondering how long the new housing market doldrums will last, as there has been agonizingly little new retail development (which depends in large part on new housing) since the housing market collapsed several years ago. As in the past few years, the outlook is uncertain, as various forecasts continue to indicate that the economy, although probably having hit its low, is not improving at a pace that will promote major recovery in the retail sector.
While the subprime credit disaster may seem to be old news, it continues to affect the housing market, as evidenced by the stricter lending criteria that were imposed in response to the standards that led to the implosion, meaning that many consumers are still having more (to much more) difficulty qualifying for home ownership as compared to the mid-2000s. The expiration of the federal income tax credit for first time homebuyers has, as expected, had a negative impact on home sales, and there do not appear to be any significant governmental assistance programs coming in 2012. This represents a change from the past few years when a wide variety of efforts were put forth to stimulate housing demand and avoid foreclosures. Although the Federal Reserve Bank’s ongoing adherence to low interest rates is helpful, the record so far has shown that this has not by itself been enough to increase housing purchases and sales to levels that would spur new housing development. In fact, 2011 did not bring much better results in new home sales over 2010, with the National Association of Realtors (“NAR”) expecting that nationally, new home sales for 2011 will wind up at about 300,000, a record low; however the NAR does project that there will be a 20% or greater increase in 2012 in that statistic.
As in the past few years, foreclosures and short sales remain major obstacles to new housing. In 2011, over one-third of existing home sales in California were foreclosures, and another one-fifth were short sales. Thus, while the sale of new and existing homes rose 4.2%, the median price dropped 3.1%, the fifteenth straight month of year-over-year declines. This was similar to the national numbers, where purchases increased 1.7% over 2010, although prices fell slightly. Although there was some foreclosure relief in 2010 based on the sheer volume and legal challenges to lenders’ foreclosure protocols, the pace has picked up again as lenders have addressed and resolved these issues. A continuing minor bright spot is that the percentage of previously owned home sales based on foreclosures decreased almost 4% from December 2011 over December 2010, to about 34%. The NAR predicts a 4 to 5 percent increase in existing home sales for 2012, which should help drive down the inventory of that product, hopefully leading to increased demand for new homes.
Employment prospects continue to plague California, and, as such, consumer confidence – a critical component of economic growth – continues to flounder. While the unemployment rate has slowly been improving, it is still at relatively high levels, both nationally and in California. Further, the uncertainty caused by global events, such as the European debt crisis, the tsunami in Japan and the continuing impact of the political upheavals in the Middle East, have undeniable, albeit difficult to quantify, effects on the overall economic picture. In addition, the continuing state and local government budget crises continue to wreak havoc on the economy around the country.
The usual suspects also continue to negatively impact the housing market, in particular the large inventory of new housing product that remained unsold when the collapse initially occurred largely remains on the market. This has made it virtually impossible to profitably build new projects in many of the areas where this inventory remains and must be absorbed before any new development can be considered.
There are also other factors that could affect the new housing market, some in unpredictable ways (such as the world events described above), but others that may be the result of new trends, such as the push toward smaller living units and more efficient use of space. For example, Santa Maria (a city of about 50,000 along U.S. 101 not far from the central coast of California) is considering allowing permanent housing units in commercial zones as small as 150 square feet, which could hurt new housing by allowing older motels to convert to apartment style living; however, it could also stimulate new housing by permitting development of more affordable housing projects.
Not much has changed over the past three years, as the new housing market continues to experience upward and downward movements on almost a monthly basis. Nonetheless, the continued historically low mortgage rates (although the NAR expects these to rise from just under 4% to around 4.5%), when coupled with, among other things, a perceived pent up demand based on population growth, lead some experts to predict that the housing market will make slow but steady gains in 2012 – not enough, perhaps, to jump start new housing to the desired level that would stimulate new retail development, but hopefully enough to create a base from which 2013 can finally start a full recovery.