Weakness in the housing market should continue in 2007, as issues of affordability, oversupply and poor buyer psychology dominate, and housing starts and home sales are weaker than expected entering the year, Fitch Ratings analysts noted in the latest “Chalk Line” report.
Though not likely, the housing downturn “could easily extend another year” if an economic recession develops before the housing downturn hits bottom, Fitch Ratings reported. “Housing continues to contract rather sharply,” the report states. “It is difficult to judge the length and ultimate severity of the correction.”
The average stock price among 15 publicly traded home builders fell 30.4 percent during a period from Jan. 3, 2006, to Sept. 29, 2006, according to the report — the price per share of Technical Olympic USA stock dropped 55.1 percent and the per-share price fell 48 percent for Beazer Homes USA stock in that time.
“The excess supply continues to be troubling,” the report states. The inventory of new homes for sale, which did not exceed 4.3 months given the sales pace in 2002, reached 7.1 months by October 2006 and 7.7 months in November 2006. A supply of about six months is considered a market in rough equilibrium, with a supply greater than six months indicating a buyer’s market and a supply of less than six months indicating a seller’s market. Meanwhile, the supply of for-sale existing homes reached 7.3 months in July 2006.
Builders were expected to cut back on land purchases in late 2006 and are expected to follow that strategy into 2007, the report states.
A national housing-price bubble is unlikely, according to Fitch Ratings, while local bubbles can and do burst. “The very robust gains in home prices in recent years have prompted concern that a possible national housing price bubble occurred and is now bursting, perhaps similar to the stock market bubble of the late 1990s.” There have been local real estate bubbles — “most recently and notably in the San Francisco Bay, Calif., area and in Las Vegas, Nev.,” according to the report.
“The growth of Internet and technology companies and stocks fueled demand in San Francisco, where there is a chronic shortage of housing supply because of restrictive land-use policies. That bubble burst when the technology and Internet sectors (and thus their stocks) contracted sharply. In Las Vegas, available land for development is in relatively short supply, as it is now mostly controlled by the government … with a shortage of supply, by spring 2004 home prices were up about 50 percent year-over-year.”
Speculators were drawn to the Las Vegas market, which led owners to put homes on the market. That coupled with a large volume of new homes on the market, burst the price bubble, according to the report. “Home prices sharply contracted in Las Vegas (particularly at the high end of the market) as speculators exited. The market stabilized by the second and third quarters of 2005.”
Fitch Ratings analysts expect that the Federal Open Market Committee, which has not tightened the federal funds rate for its past four meetings, will hold the rate steady for much of 2007 “and then move downward later in 2007,” the report states. “The Fed is trying to balance the risks of slower growth ahead with the deterioration in recent months in most core inflation indicators.”
The percentage of adjustable-rate mortgages, which had accounted for 31 percent of all home-loan financings in January 2006 and 37 percent of conventional loans in early 2005, decreased to 15 percent in October and 14 percent in November, the report states. “Clearly, there is interest-rate risk, especially for those ARMs that start off at very low ‘teaser’ levels,” Fitch analyst said in the report.
“In recent years lenders have been allowing borrowers to apply higher percentages of income to their regular mortgage payment. In the past, the norm was 28 percent-32 percent of income. Today it is not unusually for 35 percent-50 percent of income to be allocated to the mortgage payment.”
According to the latest year-to-date statistics for single-family building permits in 2006, the Fitch report notes that only five of 50 states had increases in building permits compared to the prior year, and those states include Texas (3 percent), Mississippi (25 percent), Louisiana (4 percent), Alabama (2 percent) and Alaska (up 4 percent.). Permit activity in the Austin metro area, in particular, rose 12 percent, while permits jumped 10 percent in the Houston metro area and 8 percent in the Charlotte area.
Meanwhile, single-family building permits for the first 10 months of 2006 declined 29 percent in Arizona and California, and fell 25 percent in Florida, 23 percent in Nevada and 22 percent in Ohio. Weak metro-area markets for building permits in the first 10 months of 2006 included: Detroit, down 45 percent; Jacksonville, Fla., down 36 percent; Columbus, Ohio, down 33 percent; and Phoenix, Ariz, down 33 percent.
“Often, the trend was most influenced by pent-up demand, formation of new households and growth in employment,” the report states.
Fitch Ratings analysts also noted that rising cancellation rates, “especially by buyers unable to sell their existing homes,” as well as slowing demand and some delays in opening new communities share some of the blame for a decline in new-home orders in fourth-quarter 2006 compared to fourth-quarter 2005.
Several public builders have expressed an interest in building in the New Orleans region, though some companies are not interested in single-lot rebuilding and will focus on subdivisions instead, the report states. “It is uncertain what the actionable demand will be, over what time it can be realized, and where it can be met. It is not clear there will be much subdivision building within the city of New Orleans,” the report states.