Poised For Recovery

Georgia’s prolonged and severe housing downturn has nearly run its course. Sales of new homes will bottom out in the final quarter of 2008, and sales of existing homes will bottom in the first quarter of 2009. New home sales will lead the turnaround because builders have been quicker to cut prices than homeowners. Spending on new residential construction will rise in the second, third and fourth quarters of 2009.

In 2009, the number of single-family home permits authorized for new construction should increase by 10 percent, and homebuilding will cease to be a drag on Georgia’s economy. That’s a positive development, but a 10 percent upturn in new home permits pales in comparison to the 74 percent peak-to-trough plunge in activity that occurred since building permits peaked in the first quarter of 2006.

Georgia’s single-family housing starts are at their lowest level since 1981, when the state’s population was only 5.6 million – the 2008 population is 9.8 million. At the national level, single family housing starts have hit their lowest level in 63 years.

Existing home values will not begin to appreciate until late 2009 or early 2010. Home price depreciation will continue to weigh heavily on the psyches of the consumers and on their ability to spend.

An important difference between Georgia’s housing recession and those that are still playing out in other states is that there was no investor driven home price bubble to burst. For example, investors’ share of mortgage originations peaked at only 8.5 percent in the Atlanta metropolitan area in 2005, nearly equal to their 8.2 percent share in 2000. The end result is that homes remained affordable. In 2008, the median house price divided by the median family income ratio was 2.4 in the Atlanta MSA compared to 3.5 for the nation.

Georgia’s large homebuilding industry, a seemingly inexhaustible supply of land suitable for new residential development, plus relatively few restrictions imposed by local governments on new home construction helped to ensure that home prices never really got too far out of line with household income levels and replacement costs. Home price bubbles did not develop in Georgia. That’s fairly amazing given the fast-paced population growth that Georgia enjoyed.

Consequently, selling prices of existing single-family homes have not fallen too much even as buying activity plunged and inventories of unsold and bankrupt properties accumulated. One factor that limited depreciation was the steep 74 percent drop in the number of single-family home building permits. Because Georgia’s home builders pulled back swiftly and sharply, new home inventories did not soar too much.

Since Georgia did not develop any speculative housing bubbles, home price depreciation has been and will remain modest compared to the nation as a whole. Single-family home prices in Georgia did not begin to decline until the second quarter of 2008, and the quarterly drop was only 0.7 percent. U.S. existing home prices began to decline – in the third quarter of 2007.

One factor driving down home prices is the elevated number of properties in foreclosure, which are priced by banks to sell rapidly. Consequently, existing home prices have not been as sticky as they typically are during a mild recession. In Georgia, existing home prices will decline the most in the outlying suburbs – places characterized by a lot of new neighborhoods and long commutes – and in areas where mortgage fraud was ubiquitous.

A number of forces will support the recovery of Georgia’s housing industry. On the demand side, the temporary $7,500 tax credit for first-time home buyers included in the Housing and Economic Recovery Act of 2008 will help to strengthen the starter home segment of Georgia’s housing market. Since first-time homebuyers do not have to sell a home before they buy a home, the tax credit, which expires on July 1, 2009, will help to take excess inventory off the market. By the time the tax credit expires, statewide employment and personal income growth are predicted to resume, giving more people the confidence and the wherewithal to buy homes.

Demographic trends will provide ongoing stimulus to Georgia’s housing industry. The state’s total population will grow at 1.8 percent – twice the national average. Georgia will attract retirees in greater numbers than ever before.

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