Economy: Shelter From The Storm

Home building and development have long been extremely important to Georgia’s economy. This traditional driver of growth finally got traction in 2012 and is gaining momentum in 2013. The number of single-family home starts for new construction will increase by 36 percent in 2014.

Georgia’s housing market is responding to a more favorable balance of supply and demand. Increased demand for housing will come mostly from a 1.8 percent growth in jobs. Those jobs, and slightly bigger paychecks – plus appreciating home values – will give more people the wherewithal and confidence to buy homes.

Mortgage rates will remain a tremendous bargain from a historical perspective, but they have risen above recent historic lows and will continue to move higher as the Federal Reserve winds down its purchases of mortgage-backed securities and treasuries.

Supplies of new homes are still constrained by years of underbuilding, and there’s a scarcity of listings of existing homes. That’s partially because so many homeowners are underwater on their mortgages and are therefore unlikely to put their homes up for sale. It’s especially troubling that so much of the negative equity is concentrated in the low price, or starter home, segment of the market. That hurts the trade-up market. Many homeowners realize they will not qualify for a new mortgage, so they will stay put.

In Georgia, many homeowners are simply unwilling to accept today’s depressed home prices. For longtime homeowners, today’s prices mean real losses rather than the paper losses incurred in states where home prices surged during the housing boom. I do not believe the current housing situation resembles anything close to a true “seller’s” market. Listings are scarce mostly because home prices are still well below the levels needed to get homeowners who would like to sell to consider putting their homes on the market.

 Even after factoring in recent gains, our home prices are still about 20 percent below their pre-recession levels. Home prices have only recovered to where they stood at the turn of the millennium. Once home prices rise above reservation prices, existing homes will come onto the market in very large numbers, preventing a true “seller’s” market from developing. I suspect there’s a huge pent up demand to sell, but not at today’s depressed prices.

Home prices are rebounding largely because the huge inventory of distressed homes is dissipating. The stock of foreclosures has dropped more than 40 percent in Georgia, and foreclosure inventory now accounts for only 1.7 percent of Georgia’s housing stock. That’s well below the national average of 2.6 percent.

The recent rebound in home prices is causing credit conditions to ease, but appraised values lag market values; this difference will continue to hold back conventional lending as well as housing turnover.

Overall, I expect existing single-family home prices to rise by 8 percent in Georgia in 2014. Lower-priced homes will appreciate the fastest, partially because the lowest tier has the most ground to make up and remains the furthest from full price recovery. It also reflects investors’ interest in purchasing inexpensive single-family homes for use as rental properties. Price appreciation for upper-tier homes will depend mostly on the trade-up market, which is still not functioning normally.

As potential homebuyers see price appreciation, more will opt to become homeowners; rising rents will reinforce this trend. Last year, investors were the main force behind home sales. This year, people who buy homes to live in became a second major force. As prices rise and the number of distressed properties shrinks, home sales to investors almost certainly will drop. Sustaining the recovery of the housing market through 2014 means that trade-up buyers and first-time buyers must become more active. That up-cycle has begun, but it’s not too vigorous.

One negative force is that the image of housing as an investment has been damaged and will not be repaired quickly. Another problem is that more federal regulation will keep credit tighter and more expensive than might otherwise have been the case. I wish I could say that the new federal regulations will prevent another financial bubble, but I don’t think that’s true.