Home Building: The Case for Optimism
Question: What do you get when you place the chairman of the Federal Reserve plus a few thousand home builders in precisely the exact same area?
Response: A solid sense that there are a great deal of gray clouds, but some silver linings starting to glimpse.
After walking round the International Builders Show and meeting and talking to contractors from across the country a week, I got a sense that there’s some optimism out there. There’s a feeling that the restoration is taking hold and their construction businesses have weathered the worst of the excellent Recession. Certainly, these folks have started to see some silver linings in all those gray clouds.
Then we all piled into a huge meeting room to obey the Federal Reserve Chairman, Ben Bernanke.
Bernanke pointed out all he reasons why the home construction market was in the doldrums these last couple of decades. Rather than being the motor which would pull the nation out of recession, the housing industry is an”impediment to a quicker recovery.” Bernanke also provided some thoughts for the way the home industry can recover: loosening of charge, lenders instituting real-estate-owned-to-rental programs or local governments starting property banks one of them.
Here is Bernanke’s description of these gray clouds which have been around for a couple of decades, and the silver linings which could be starting to reveal themselves.
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Because of lower home values, the downturn wiped out $7 trillion in family wealth, according to Bernanke. That is a staggering sum of money equal to half the national debt. It’s no wonder Americans feel poor. Bernanke also pointed out that the normal family spends $3 to $5 for every $100 in missing home value. If so, the depressed home values is reducing consumer spending 200 billion to $375 billion yearly — money not generating jobs and raising living standards.
There’s a glut of foreclosed homes for sale, and over 1 million foreclosed components will go into the marketplace each year for the upcoming few decades. The saturation of existing homes on the market is keeping new home construction starts to historically very low levels. Rather than viewing at least 1 million starts each year, the industry is reaching about 500,000 starts.
Credit is still tight as creditors are hesitant to make loans even to qualifying borrowers. Home mortgage credit has contracted by roughly 13 percent since 2007. It appears that the loose credit practices of a couple of decades ago have given way to restrictive practices as creditors are wary of any debtor.
Lack of Demand
Young adults — those in the 29 to 34 age category — are less likely to take out mortgages. These first-time buyers have an incremental effect on the home market, so their absence is felt the line.
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Unemployment and Job Creation
The economy has been recovering, as evidenced by an unemployment rate that inches reduced and a private business that continues to create jobs. Though everyone will admit that the economic recovery has not been strong, there’s a sense that we are on a slow but sustainable route to healing.
The consensus is that we should expect some small increase in the housing market this season and stronger expansion in 2013. Though the sum of growth seen over the last year and prediction for next year changes by region, there’s a consensus that expansion of between 1 and 2 percent will occur.
Home prices in much of the nation hit their troughs in the first quarter of 2011. Current pricing amounts are at the historic median of 3.2 times earnings. Compare this to the summit of the bubble when home prices reach 4.7 times median earnings.
The confluence of reduced interest rates, lower prices and growing incomes has reduced the cost of purchasing a home. Prices should remain low because of the high number of distressed properties on or entering the market, and the current Federal Reserve policy will be to maintain low interest rates.
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There is a growing strength in the rental market as the economy strengthens, but potential buyers aren’t ready to purchase. Programs like REO (real-estate owned) to rental should absorb some of their extra inventory given the strength of the rental sector. This can help home worth from falling further and perhaps encourage new construction starts.
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