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The worst of the housing downturn is largely over for the hard-hit West Coast, according to speakers at PCBC in San Francisco last week, but the next year or so will be relatively slow going for builders there, who were advised to get prepared for a marketplace that has been dramatically transformed by the worst U.S. slump since the Great Depression.
The dark mood that has clouded the region is dissipating, according to economist Elliott Pollack, chief executive officer of Elliott D. Pollack and Company in Scottsdale, Ariz., an economic and real estate consulting firm. And even though it will take a few years for California and some big metro areas in the West to return to prime health, “if I’m you, I’m doing cartwheels,” he said.
“The worst is over,” said Pollock. “Things are slow. They’re not going to get better in a hurry, but they’re getting better.”
In the Phoenix market where he is based, there are only about 130 builders left standing today, down precipitously from the roughly 860 who were active in the area at the height of the housing boom in 2008. Arizona’s population growth is down by two-thirds, he said, and in terms of economic growth it has plummeted from one of the top five states to 49th last year.
Phoenix is struggling with an excess inventory of some 40,000 to 50,000 homes, according to Pollack, and lower household formation rates stemming from the recession, when people doubled up to pool their dwindling financial resources, is making it that much harder to work off the excess despite a highly affordable housing stock. Eighty-two percent of Phoenix’s residents can afford a median-priced home these days, he said.
The courthouse steps is where business is brisk, as investors — who are accounting for 40% of local home resales — snap up foreclosed properties and turn them into rentals that are priced low enough to lure renters out of apartments.
But “don’t get caught up in the numbers,” he said. “Things will get progressively better. This is the flip side of 2005 to 2006. Capital will show up and there’s a lot less competition.”
He predicted that conditions will be “better” next year, but it will be “2012 to 2013 before you start to feel good again” and 2015 for the market to be fully restored. By that time, the median house price in Phoenix should be up a brisk 50% from currently depressed levels.
“The question is how long it takes the market to clear,” said Pollock. “One day people will turn around and see the supply is gone and prices will jump.”
Nationwide, NAHB Chief Economist David Crowe forecast that gains in house prices will be modest for at least the next two years, held down in part by the dozen states where two-thirds of foreclosures are concentrated, including most prominently the boom-and-bust states of California, Nevada, Arizona and Florida.
The employment picture continues to be a major sticking point for housing, according to Crowe, and along with a patched-up housing finance system and a full-blown credit crunch for loans to produce new housing, is resulting in a slow rebound, “one in which patience will be the best virtue out there.”
In the recession of the early 1980s, it took nine business quarters for jobs to be restored to the level of the previous peak, Crowe said. In the early 1990s, it took 11 quarters and in the early 2000s 16 quarters. Coming out of this recession, “we’re well beyond that already — 18 quarters now and it is likely to take several more.” This has had a negative “feedback effect,” raising a feeling of uncertainty and confusion among consumers, whose confidence is all-important for a rally in home sales.
For the short term, “the question of the day” is whether the home buyer tax credit — which was more beneficial to first-time buyers than those trading up — has gotten “the ball rolling,” he said. “Are low mortgage interest rates, a recovering employment market and affordable home prices sufficient to bring people back in?” he asked. The answer may lie in the June new single-family home sales statistics released by the Commerce Department next month, he suggested.
Some economists have said there is a possibility of as much as a 25% to 30% falloff in sales in the immediate aftermath of the expiration of the tax credit.
Over the longer term, the housing recovery at hand “is unfolding in a completely different way than usual,” Crowe said, with California and other large states coming back less and mostly small states — Montana, Wyoming, New Mexico, North Dakota, Kansas, Oklahoma, Louisiana, Mississippi, Missouri and Tennessee — leading the way. Only one big state — Texas — will be in the vanguard of the housing upturn.
“We lost about 1.5 million households during the recession,” he added, and “that is why I am a little less worried than others about the excess inventory.” Conceding that there will be a time lag for empty homes to be absorbed as individuals gradually land jobs and move out of overcrowded households, he said that people won’t start to feel the improvement until at least next year, and in California and Arizona it will be much longer than that before good times arrive.
Both economists offered advice to builders hoping to succeed in what remains a tough market.
In the face of an increasingly diverse population, “you have to find a niche, a specialty, something you can do better than others,” said Crowe.
Know your market, who you’re selling to and what they want, said Pollock. “Keep overhead low and line up equity; it will take more equity than in the past.”
In a survey of 675 building industry professionals pre-registered to attend PCBC, 96% responded that they saw their businesses contract as a result of the recession. Forty percent reported that their company’s business had begun to improve, and 32% said that the contraction had stopped.
Sixty-five percent of those surveyed said the recession had made them more adaptable and 53% said they had become more innovative.
“Home builders tend to be resourceful by nature,” said Linda Baysari, senior vice president of PCBC. “It’s heartening to see that in the midst of this recession, they are becoming even more adaptable and innovative.”
More coverage from PCBC will appear in the June 28 issue of NBN.