Housing markets with the biggest booms in 2004 and 2005 will generally be the slowest to return to normal levels of activity and those that showed more restraint will be the first to get back on track, according to a regional industry outlook for single-family production in 2007 and 2008 released by National Association of Home Builders economists.
The major exception is the Midwest, the hardest-hit region of the country where some key markets that have been languishing because of weak local economies aren’t likely to see brighter horizons until next year as job and income growth gradually improve.
The report notes that the correction that started last year has affected different markets to different degrees, “but even markets with few signs of over-heating during the boom have slowed considerably.”
“Nationally, the pace of housing starts in the fourth quarter of 2006 was down more than 29 percent from its peak in the third quarter of 2005,” the housing analysts say in an overview of their state and metro area housing starts forecast. “In local markets, half of the 100 largest metropolitan statistical areas that NAHB forecasts were down between 15 and 40 percent from their 2005 level of production, while some of the most severely affected markets were down 50 percent or more from their 2005 highs.”
Nationally, NAHB is forecasting almost 1.2 million single-family housing starts in 2007, a 30.2 percent decline from a peak of almost 1.72 million in 2005, and 1.31 million in 2008, down 23.8 percent.
Double-digit rates of house price appreciation in 2004 and 2005 on the Office of Federal Housing Enterprise Oversight's House Price Index (HPI) “clearly indicate markets out of balance,” the report notes. Metro areas with prices climbing the fastest between the fourth quarter of 2003 and the same period of 2005 include: Naples, Fla. (70.5 percent); Bakersfield, Calif. (70.3 percent); Palm Beach, Fla., (67.4 percent); Cape Coral, Fla. (66.4 percent); and Phoenix (63.5 percent).
To analyze the extent of overheating in individual markets at the height of the boom, the economists compared the levels of starts in 2004 and 2005 to a “normal” level, which was calculated as the five-year average production level from 1999 through 2003.
Some markets were in decline during the two-year boom period, producing fewer starts than the benchmark five-year average, the report finds. “But two-thirds of the 100 large metropolitan areas covered in this report produced more than 115 percent of this benchmark in 2005, while one half produced at least 120% of this pre-boom demand.”
The economists attribute the unsustainable levels of excess demand to “historically low interest rates coupled with aggressive lending practices,” a combination that made homeownership more affordable and also attracted investors and speculators in many markets.
“Because the boom and correction cycle has been largely driven by national rather than local factors, the housing market experience of 2004 through 2006 has been unusually similar in pattern and timing across regions of the country,” the report says. “While the regions differ somewhat in the level of peaks and troughs, some degree of over-heating and correction has affected all regions.”
The South has fared the best through this cycle. Not only did it have the highest peak during the boom — 145 percent of normal demand — it also had the highest trough in the final quarter of 2006, when demand dropped to a roughly normal level.
The West climbed to 143 percent of its pre-boom average, but then slipped to only 90 percent by the end of 2006.
In the most compressed cycle of the nation’s four regions, the Northeast rose to 127 percent of average production at the peak and fell to 92 percent in the fourth quarter of 2006, a 35 percentage point swing.
“The Midwest has fared the worst in this cycle, posting the lowest gain during the boom, only 116 percent, before falling to 68 percent of pre-boom production by 2006’s fourth quarter,” the report says.
The following provides a closer outlook at the NAHB forecast for specific metropolitan areas:
South Atlantic Division
Atlanta, which accounts for about two-thirds of housing starts in Georgia, as well as Asheville, Charlotte, Durham, Greensboro, Raleigh and Winston-Salem in North Carolina, all declined last year, but to levels that were near or above pre-boom production levels. The Atlanta and Durham metro areas are expected to return to positive growth early this year, with the remaining areas experiencing further but small declines throughout the year before turning positive in early 2008.
By contrast, housing markets in Florida have seen some of the highest levels of excess. Housing starts in Cape Coral/Ft. Myers spiked to 337 percent of normal activity in 2005 and prices rose exponentially. Orlando was up to 150 percent.
“Our forecast is for Florida markets to be among the weakest nationally, experiencing further declines through 2007 as these excesses unwind before stabilizing in 2008. Several of these markets, including two of the three largest, Orlando and Tampa, remain above levels of pre-boom demand, in spite of substantial declines in 2006, suggesting that these markets still have further correction in store. Miami, the largest housing market, is one of the few metro areas in Florida to have declined to pre-boom levels.”
Greenville, S.C. “has shown consistent strength while avoiding extremes in price appreciation and production, and seems immune to the corrections currently going on in other markets.” Elsewhere in the state, Charleston (up to 178 percent of pre-boom production during the two peak years) and Myrtle Beach (up 264 percent) are among the most over-heated markets in the country. Last year’s decline was severe in Columbia despite a strong economy, restrained price appreciation and only some excess production, but it has brought the market down to pre-boom conditions and has set the stage for a return to more sustainable growth. Further significant declines are projected for Charleston and Myrtle Beach this year.
West South Central Division
Dominated by Texas, which accounts for roughly 75 percent of its housing starts, this division had the strongest growth during the boom and has maintained the highest level of production through the correction. Posting steady growth for a decade with no signs of rapid price increases or over-production, Houston experienced only a modest decline in the fourth quarter of 2006, and the NAHB forecast calls for a quick return to steady growth in the area in the first quarter of 2007 and continued strength through next year. Dallas did show signs of overheating, with an annual single-family production rate of 57,000 at the peak, compared to an average of 38,000 in the five years preceding the boom.
The Dallas market is expected to recover to an annual pace of 45,000 by the end of this year and rise through the end of 2008. Both Austin and San Antonio reached 145 percent of pre-boom demand in 2005 before declining sharply. The decline in the former is expected to bottom out by the end of 2007 at 2004 levels, before recovering and returning to moderate growth through 2008. San Antonio, on the other hand, is already at 2004 levels and poised for steady growth this year and next.
Also in this division is New Orleans, where starts rallied last year from a 2005 collapse to rival pre-Katrina levels. NAHB’s forecast is for 9,000 starts by the end of 2007 with continued strength through next year. “After nearly 18 months of waiting, New Orleans may finally get its post-Katrina recovery going.”
East South Central Division
Comprised of Alabama, Kentucky, Mississippi and Tennessee, this and the West South Central division were the only divisions at the end of 2006 with production above pre-boom levels. The division rose to 134 percent of normal demand during the boom, before receding to 113 percent of pre-boom levels last year.
Mountain Division
The Phoenix metro area rose to 149 percent of pre-boom demand in 2005 before dropping to 79 percent by the end of 2006, making it one of the most volatile markets in the nation. Las Vegas performed similarly. NAHB is forecasting that after such steep corrections both will grow only moderately this year and next as they cope with the price, production and investor excesses that have swamped them.
Pacific Division
The boom in California, which accounts for 70 percent of the starts in the division, “had less to do with investors and more to do with the demand for affordable housing in California. As demand and prices rose nationwide, demand in California shifted, rising least in areas where prices were already high, and most in areas where prices were relatively low.”
In the Riverside metro area, where National Association of Realtor data shows a median home price of $374,000 in 2005, starts rose to 171 percent of pre-boom demand. By comparison, production remained largely unchanged in Los Angeles and actually fell in San Diego; the median 2005 home prices in those two markets were $529,000 and $604,000, respectively.
The same pattern appears in the northern part of the state, where demand was stable or declining in high-priced markets and booming in relatively lower-priced areas. Housing starts in 2005 were flat in San Francisco and San Jose, where the median home prices were $716,000 and $745,000, respectively, but in Sacramento, where the price was $376,000, housing starts hovered at roughly twice the pace of the early and mid 1990s.
“Our forecast is for the Los Angeles, San Diego and San Francisco markets to have strong gains in 2007, based on the current deceleration in prices, the absence of over-production during the boom and the depth of their slowdowns in 2006,” the report says. “However, these gains will slow somewhat in 2008, leaving these very high-priced markets still below trend production as fundamentals catch up with the recent rise in prices.” Riverside and Sacramento, which have fallen substantially from their peaks, will have moderate and steady growth over the next two years.
Northeast Region
The Northeast has experienced a fairly restrained housing cycle in comparison to the South and West, the report says. “Among the major markets in this region, Boston and New York had production levels that look more like recovery from a slowdown earlier in the decade than an over-stimulated boom. The Philadelphia metro area was even more restrained, hovering at relatively normal demand through 2004 and 2005.” The severity of last year’s downturn in these markets is “surprising” and “likely to be temporary.” The NAHB forecast calls for “quick recovery in these markets and a return to more normal levels of production based on the fundamental health of the underlying economies.”
Midwest Region
The housing cycle in the Midwest has suffered the most, with the lowest peak during the boom and the deepest trough in the correction, primarily because of the weak economies of the region’s old industrial cities — Chicago and Detroit in the East North Central division and St. Louis and Kansas City in the West North Central division.
Minneapolis, with one of the stronger economies in the Midwest, is expected to see its housing market start growing again early this year and continuing through 2008. NAHB is forecasting that Chicago, St. Louis and Kansas City will stabilize throughout the year before returning to growth in 2008, based on an improvement in local economic conditions.
The Detroit metro area is in for continued deterioration this year before turning positive in 2008. “While the economic conditions remain relatively weak, housing starts have declined to well below historical norms. By the end of 2006, starts had declined to a pace of 6,000 annually. This compares to an average pace above 16,000 from the early 1990s to 2005. Detroit is definitely suffering difficult economic conditions, but even in decline, this market area with a population over 4 million will recover and return to production higher than current levels,” according to the NAHB forecast.