From Dan Harding on January 20, 2009 in Remodeling News
The perfect storm has been created and what most people want to know is where in the storm are we and when is it going to clear up?
There are a lot of conflicting forecasts some suggest the market hit bottom in 2008, while others say the housing market will drop another 10 to 20% by mid 2009. The best bet is to be prepared for anything and do whatever it takes to weather the storm.
How to Forecast
There are many factors that affect housing: home sales, housing prices, housing starts, housing permits etc. These are all vital indicators, but the inventory numbers in particular are most important.
Inventory of homes for sale is measured as a number of months supply at a current pace of sales, e.g. if, in a particular area the inventory of existing single-family detached homes for sale was 8.6 months, it would take that long to deplete the supply of for-sale homes. The more months of supply indicates a weaker housing market and fewer months suggests a limited number of homes for sale or the sales pace is faster.
Employment trends and unemployment rates are also important indicators of local housing market conditions. If, in a particular area, employment is expanding people will be moving into that area and, since theyll need a place to live, this will be a positive for anyone in the remodeling or building industry.
You can also get useful information from reports and articles published by the Federal Reserve and its 12 district banks. Each bank puts out their own periodicals about local economic conditions, which include sections about the outlook for commercial and residential real estate. Link to the Feds Beige Book: http://www.federalreserve.gov/fomc/beigebook/2008/default.htm
Link to the map of the district banks: http://www.federalreserve.gov/otherfrb.htm
Programs Help Stabilize the Market
- Tax waiver - Last year, congress started removing some financial vulnerability of default when it passed a bill that temporarily waives the income tax on mortgage debt that is cancelled when a homeowner is foreclosed upon, sells a home for less than the remaining debt (short sale), or gets a loan modification that reduces the principal balance. This tax waiver applies only to debt on primary residences cancelled through 2013. Exceptions the tax waiver applies only to debt that was used to purchase or improve a primary residence.
- Mortgage help - Federal Housing Administration is offering two programs: Help for Homeowners and FHA Secure. And, The Streamlined Modification Program, sponsored by the government agency that oversees Fannie Mae, Freddie Mac, and 27 loan servicers, promises to quickly reduce payments for certain homeowners who are on the verge of foreclosure.
- Chapter 13 relief - Now that Citigroup has announced its support for legislation that would allow people in Chapter 13 bankruptcy to get their mortgages modified via judges, advocates are hopeful that other lenders will follow suit. These modifications, known as cram downs, include reducing principal, interest rates, or extending the mortgage term.
Incentives to Jump-Start the Stalled Housing Market
- First-time home buyer tax credits - This is smoke and mirrors for the most part, certainly not enough incentive to spark interest for a first-time homebuyer to take a risk. The current $7,500 tax credit is more of a loan that has to be paid back instead of a true tax credit. Home builders suggest a larger tax credit that would never have to be paid back and NAR supports keeping the current tax credit, but also removing the requirement that it be paid back both ideas might be enough to give buyers an additional incentive to buy now instead of holding off.
Incentives that SHOULD be enacted
- Allow down payment/closing cost assistant programs, such as Nehemiah Bush shut down these types of programs last July by signing H.R. 3221 Housing and Economic Recovery Act of 2008. Prior to this bill, the seller could contribute up to 6% to the buyer to cover down payment or closing costs.
- Government buy-down of mortgage interest rates for home purchases with a termination date of December 2009.
- Allowing immediate use of tax credit (first-time homebuyers) for down payment/closing.
When will the market recover?
Existing home sales have increased in certain markets because theyre finally affordable. Buyers feel the housing slump has bottomed out or theyre buying because finally the mortgage payment is equal to rent. Youll probably see the bottom hit between 3rd and 4th quarter 2009. Historically speaking, once the market bottoms out there will be a 3 to 4 year adjustment period where pricing will remain flat. The new housing market will most likely be sluggish through 2010-2011 as existing inventory settles.
Projections for housing starts
The NAR is projecting housing starts to continue falling in 2009 by almost 22% as builders hold back on new construction and continue unloading current inventory, which would total around 731,000 units. They say a rebound, though weak, wont occur until 2010, approaching a rise of 6% to 772,000 units. The National Association of Home Builders has a different outlook on building activity. Theyre projecting housing starts to hit bottom at 740,000 units in the first quarter of 2009 before rising to 835,000 units by the end of the year. And, theyre projecting 1.1 million housing starts by the end of 2010.
Home builders have entered the home remodeling industry to stay afloat during these bleak times, forcing existing remodelers into an even tougher and more competitive environment. In 2007, the value of home improvements fell by 4% and in 2008 its expected to more than double to 9% and rise to 11% during the first quarter of 2009. Though these declines are harsh they dont compare with the declines impacting the home building industry, which are off by 65% since the beginning of 2006. So moving into the remodeling arena is a much safer bet. According to NAHB, half of the builder members have made the leap into the business of remodeling. The value of remodeling jobs is project to approach $400 billion by 2015.
Builders and credit
Due to tight credit over 140 private homebuilders throughout the country have teamed up to form the Building Industry Coalition for Economic Recover. Their main goal is to force lenders into allowing them to complete existing projects instead of being forced into foreclosure. If allowed to finish their projects they would be able to extract a huge difference on the value, 40 to 60 cents on the dollar versus 20 to 30 cents. Builders are now asking for congressional support for mortgage cram downs, where bankruptcy judges will be allowed to modify loan terms in order to prevent foreclosures.
The national housing market is large enough to encompass a wide variety of trends in various places and on various timelines. The most well respected forecasters make errors and tend to disagree with each other but, even if a forecast proves true nationally, your local market may behave in a wildly different way. Because of all the variables, youll need to rely on your own best judgment.