I recently attended the International Builders' Show in Orlando, Fla., to get a sense of where homebuilding is going for the next couple of years
For all of the economic forecasts out there, it is always good to speak to those who are actually doing the building to understand the issues they are facing. From my unscientific survey of attendees, there is renewed optimism among builders that bodes well for all who are in construction regardless of whether they are actively engaged in residential construction.
As we all know, the overheating of subprime lending brought years of extra housing supply to the market that needed time to be soaked up and worked through the system. The crash in the subprime market precipitated a broader crash in the residential market that had effects that rippled throughout the economy. The residential market responded as free markets do – when there is low demand and oversupply, prices began to drop and have continued to do so for many years. However, there is evidence that many markets have bottomed out and prices have firmed up. While 2012 is hardly shaping up to be a banner year, the firming of existing home prices is reason to hope that the abnormally low volume of homes being constructed will begin to rebound in 2013 and 2014 to levels closer to the median.
Some markets are already beginning to show strength. Multifamily housing is growing again as more people turn to renting rather than buying. In the midst of the boom, 50 percent of all multifamily structures were built to be sold as condominiums; that number is now below 10 percent. That would lead one to believe that the market is down; however, things are really looking up in the segment with rents increasing. With super-low interest rates and banks making credit available, developers are building to bring supply to the market.
Issues still remain, with foreclosures, shadow inventory, and European debt leading the way. Foreclosures are a difficult problem for the industry because of their effect on surrounding home values. Experts estimate there are still between 1.4 million and 2.4 million homes in some stage of foreclosure, though the rates of growth of foreclosures are well below previous years. These properties serve as a large drag on pricing, and until these properties are soaked up by demand, the industry will have a difficult time significantly growing housing stock.
Why does this matter if you are not involved in residential construction? For the vast majority of Americans, housing is the single largest investment they have or will ever have. The health of this investment affects how they spend their money in the broader economy. Housing won't singlehandedly bring the economy to recovery; however, housing will be a much better barometer of the overall health of the economy than GDP growth or the unemployment rate. When Americans start feeling good about the economy, then we will begin to see home formation rates return to historic levels and the nation's builders will begin building homes again. When that happens, commercial, retail, and municipal projects will begin to reappear in short order.
While the light at the end of the tunnel is not imminent, builders and economists agree that the necessary foundation has been laid for a recovery. For the first time in a long while, there is reason to be optimistic.
W Hobson Hogan, a senior consultant at ZweigWhite, assists AEC firms with strategy formulation and ownership transfer issues, including buyer and seller representations.
Contact him at email@example.com.