Too Quiet On The Homefront

For much of the last two decades, an important part of my life has been taking the Terry College of Business’ annual economic forecast to businesspeople throughout the state.

On this extended annual road trip, I field hundreds of questions. Some are forever popular: Where are interest rates headed? Others reflect local interests, with questions about Fort Benning and the defense industry common in Columbus. The last two years, I’ve been peppered with queries about Neal Boortz’s Fair Tax proposal – which, by the way, I support.

This year’s most intense questions were related to the housing situation. When will the housing recession end? Will home prices decline? How will our local housing market fare?

My response was that few if any of Georgia’s single-family housing markets would dodge the housing recession, which will not end until late 2007. Georgia’s housing downturn will be focused on the housing industry itself and other closely allied businesses. I was not too worried about contagion between the housing recession and overall consumer spending figures.

I suggested that 2007 would be a great time to find a good deal in what is fundamentally a solid market for single-family housing in Georgia.

Now it’s time to look back at the last few months and ahead to 2008 prospects. So far this year, the number of single-family housing permits authorized for new construction declined by 29 percent in the United States and by 27 percent in Georgia. Among Georgia’s large metropolitan areas, Atlanta suffered the most – permits were 35 percent lower than in 2006 – and Savannah fared best, with permits down by less than 1 percent.

The sharp pullbacks reflect homebuilders’ relatively rapid response to the slowdown in sales of new and existing homes. The National Association of Realtors reported that U.S. new home sales in May were 16 percent lower than in 2006 and sales of existing homes were down by 10 percent.

The association also noted that the national median existing home price for all housing types in May was 2.1 percent below where it was in May 2006. Yet these home price comparisons undoubtedly overstate the pain. They are distorted by the fact that sales have shifted away from many high-cost market segments. An alternative measure produced by the Office of Federal Housing Enterprise Oversight compares repeat sales of the same single-family homes; I believe it is a much more accurate gauge.

Based on this metric, the nationwide rate of home price appreciation for existing homes slowed dramatically in the first quarter of 2007, but did manage to stay positive at 0.5 percent compared to the final quarter of 2006. The increases both in Georgia and Atlanta were 0.7 percent.

National City and Global Insights note that 157 of 317 metro areas suffered price declines during the first quarter; but, fortunately, none of Georgia’s metropolitan areas is considered overvalued.

Home prices in Atlanta are 4.5 percent lower than expected after taking into account factors such as household incomes, population, interest rates and historical premiums or discounts. Prices in Macon and Warner Robbins were 5.3 percent and 11.3 percent lower, respectively, than one would expect. Prices in Albany were 2.1 percent lower than expected and, in Columbus, 3 percent lower.

Despite rising delinquencies, especially for subprime mortgages, and high inventories of unsold homes, many of the fundamental determinants for Georgia’s housing industry look fairly good. During this downturn, developers of single-family homes pulled back fairly quickly. That helped to restrain supply growth.

On the demand side, growth in employment and personal income was sustained throughout the housing downturn. The state’s population will grow at a pace that is nearly double the national average; and the state is well positioned to attract retirees in much greater numbers than ever before.

I believe a turnaround in the new home construction industry will begin in the second quarter of 2008, only one quarter later than I expected. I still expect the selling prices of the vast majority of existing homes in Georgia to “rust” a little rather than “bust.” I’m holding onto my house, but while prices are still so reasonable and selections abundant, I might try to scrape together enough money for a retirement home. I’d better get it before my fellow “boomers” skim off all the good properties.

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