Housing shows glimmers of hope

June 14, 2012|Mary Umberger | On Real Estate
  • First-quarter U.S. housing starts rose 20.1 percent. Las Vegas, Phoenix and South Florida posted strong gains.
First-quarter U.S. housing starts rose 20.1 percent. Las Vegas, Phoenix and South Florida posted strong gains. (Jeff Sainlar, McClatchy-Tribune)

Though some might consider it one of those "when pigs fly" moments, homebuilders have begun raising their prices.

At this point, it's an aberration seen in only a few cities and by only a few builders, but after several years of truly abysmal business conditions, a few housing submarkets are healthy enough to risk a price hike, said Brad Hunter, chief economist for Metrostudy, a national housing data analyst.

That circumstance and other observations led Hunter recently to resurrect a guarded optimism for homebuilding, and real estate in general, after a long, dry and painful spell. He said he started telling builders as early as 2004 that bubble trouble was brewing.

Hunter explained why he thinks the worst is finally over (with a major caveat), how former foreclosure victims may be contributing to a homebuilding uptick and how some cities that have been housing disaster zones are starting to breathe easier.

Q: Your company has a unique way of tracking homebuilding. How does it work?

A: In other companies, a bunch of (market researchers) call up real estate agents or track building permits to get samplings of data. But we actually drive through 84 metro areas: 400 researchers drive every street of every subdivision where builders are active or have planned projects and they count, house by house, what's being built. That driving is done during a two-week period at the end of each quarter. We drive half a million miles every 90 days.

Q: What did you conclude at the end of the first quarter?

A: I believe we're starting to see a genuine return to organic demand. That means we had this phony-baloney demand after the boom went away. The federal tax credits for buyers and other government interventions, some foreclosure moratoria, the robo-signing documentation scandals and other events created all kinds of gyration within the market that prevented getting a true read of buyer and seller behavior. I finally feel like we're past all that artificial stuff, and the traditional organic reasons — somebody gets a job or starts a family or other natural reasons to buy a home — are holding sway.

Q: Where is the most significant activity happening?

A: The most hard-hit markets like Las Vegas, Phoenix and South Florida are seeing substantial improvement. Annual starts between the beginning of 2011 and the first quarter of this year are up by double digits in 13 of the 33 top markets. Of course, nine of the 33 are in the negative column, but overall housing starts are up 20.1 percent versus one year ago.

In Phoenix, there's been a really dramatic reduction of inventory (of homes for sale) in the resale market, which has allowed prices to rise there. Phoenix is pretty much past the bottom. And it's much the same in Las Vegas; people don't realize that Las Vegas has seen a great deal of improvement.

Elsewhere, starts during that period are up about 10 percent in Indianapolis, 3.6 percent in Chicago, about 8 percent in Atlanta, about 12 percent in Salt Lake City, about 18 percent in Denver and 24 percent in Charlotte, N.C. Starts are down in Albuquerque, N.M. (by about 10 percent); suburban Baltimore (1.6 percent); and San Antonio (1.4 percent).

Q: What's driving the overall improvement?

A: The significance, to me, is that as the economy continues to improve, and presuming that Europe doesn't pull us into another recession, we will continue to see more of that organic demand from people forming households. These are the ones who hunkered in their parents' basements and took in roommates. That pent-up demand will come back into the market.

For decades, the normal, very consistent household formation rate was 1.3 million to 1.4 million every year. During the recent recession, the household formation rate fell to 400,000 to 500,000 a year, and now it's starting to move up gradually.

Of course, we recently had a bad jobs report (followed by a fairly positive report on new unemployment benefits claims), but as long as the economy continues to improve, we'll see that household formation rate continue to improve, leveling off at 1.1 million or 1.2 million over the next three years.

Q: Other factors leading to an improvement?

A: People who lost their houses in short sales in 2009 have passed the required three-year waiting period for applying for FHA loans and are starting to buy again. It's a small blip now, but I think that will become more significant.

And I think short sales and foreclosures are less of a threat to homebuilding because people are tired of dealing with banks and the time it takes to get the (purchase) process moving. With foreclosures, people are recognizing that those homes are starting to fall into disrepair, and they don't want to pony up cash to do the fixes.

Interestingly, I'm hearing that people are taking a look at brand-new subdivisions because they know they're buying in a place where they won't find any foreclosures, like in the older neighborhoods.

Q: You said you're seeing some builders raising prices. Where?