2010 Economic Forecast: The Bear Turns Bullish
Signs Point to Housing Turning the Corner by July
By John Burns and Sean Fergus
In June 2006, we told attendees at PCBC that the housing downturn was going to be disastrous and last through 2011. Frankly, we were surprised by the negative reaction. We had been telling our clients this for months and, while most of the builders disagreed with us, most knew that the housing market was falling apart.
One of our clients had been running $100,000 discount ads in Sacramento since February, and the CEOs and division presidents all remembered the early 1990s. What was most amazing to us was the lack of knowledge by the many industry participants who did not sell homes for a living, as well as the bullishness of participants in areas that had not yet been hit hard.
In April of 2009, we reversed our tune and called for a “W,” which would be an improvement in the market until the tax credit expired. However, with the federal tax credit extended through June for all buyers, and affordability far better than we imagined at the time, the risk of a second leg down has been significantly reduced.
The bottom line is that we are far more bullish on the prospects for California new home stabilization in 2010 now that the federal tax credit has been extended and expanded. Housing conditions should improve thanks to:
• Government stimulus programs to generate homebuying activity through June.
• Stock and debt market improvements that have improved consumer wealth and confidence, and allowed publicly traded companies in all industries to raise significant cash that they will use to hire people.
• Excellent affordability as a result of falling home prices and 30-year mortgage rate lows.
Obviously, all is not rosy. The following headwinds will challenge the recovery:
• Current job losses that are significant and will be exacerbated by coming layoffs at the state and local governments.
• Most higher-priced homes are still overpriced, and the expensive coastal markets will get hit hard with option ARM adjustments.
• Mortgage rates and down payment requirements will play a huge role in the recovery, and terms for 90 percent of all mortgages are currently dictated by the Fed (through purchases of mortgages from Fannie and Freddie) and HUD (through an almost insolvent FHA).
• A tsunami of Real Estate Owned-selling that will be with us for several years as the loan modification programs are declared a failure.
Looking at all of the negative and positive above, we believe the stimulus will be enough to allow housing to continue to “walk a tightrope” until July, when housing should be able to stand on its own two feet once again if the job losses have ended and mortgage rates are still below 5.5 percent. Since most economic forecasts call for mid-year job growth and low mortgage rates, we are putting our faith in the economists and declaring that the housing downturn is virtually over.
If the economists are wrong, either we get another round of government stimulus or we get another decline in home prices and sales.
Sales Volumes
New home sales should rise during the first half of the year, thanks to low mortgage rates and newly designed homes with tremendous values. We have been very busy running our proprietary demand model that shows buyer demand by price point and household composition, so our clients can target what today’s consumers need. Today’s consumer is very different than the 2005 buyer.
Existing home sales are strong, and are driven by investors as well as value-oriented buyers. The relocation and move-up buyers have all but disappeared. Remember to strip bank foreclosures out of your resale analysis, or you will overestimate resale demand and prices. As the year progresses, foreclosure sales will become an even larger share of the volume and will challenge new home sales as the banks finally learn how to sell REO and short sales.
Prices
High-priced homes, which are primarily resale homes, should get hit hard in 2010 by the option ARM distress as well as the impact of job losses. Fortunately for the new home industry, few communities are in these neighborhoods and price points. Irvine Ranch is the most notable exception in the state. Irvine Ranch still benefits from amazing international appeal thanks to its school system and job proximity, however, so foreign buyer demand should help stabilize Irvine. Due to both the fall in home prices and the fall in the dollar, Irvine looks extremely cheap to foreign buyers.
Media Reports
While many housing and economic indicators have improved recently and should continue to improve in 2010, they are being compared to terribly low levels experienced in early 2009 in the worst recession in 70 years. The positive media reports will help restore consumer confidence in homebuying.
California’s Economy
New home demand throughout most of California will be very low as we expect the state to continue to shed jobs for most of the year. Until buyers either feel more comfortable with the current economic environment or find new employment, they will be weary to take on such a large financial responsibility. Also, a weak labor market is likely to limit any sort of quick V-shaped recovery in home prices over the next year.
Temporary worker hiring, increased hours worked, and easing bank credit requirements for businesses will be the early indicators that the labor market and overall economy are improving. We are starting to see some positive movement in temp hiring and hours worked, but credit continues to be tight. We publish these statistics for free in our monthly U.S. Building Market Intelligence email.
New Home Market
New home sales in 2009 fell about 27 percent, and we expect another 20 percent decline in 2010. We expect the sales per community to gradually improve throughout the year and to be at least 50 percent higher than 2009 levels. However, so many communities are selling out that the community count will be well down. The table below breaks out our new home sales projections by MSA.
California New Home Sales Projections
| Metro Region | 2008 | 2009* | 2010* | 2009-2010 Change |
| Bakersfield | 2,170 | 1,400 | 900 | - 36% |
| El Centro | 489 | 300 | 300 | -- |
| Fresno | 2,551 | 2,100 | 1,700 | - 19% |
| Hanford | 253 | 150 | 100 | - 33% |
| Los Angeles | 6,362 | 5,500 | 3,900 | - 29% |
| Madera | 192 | 75 | 200 | + 167% |
| Merced | 562 | 200 | 100 | - 50% |
| Modesto | 844 | 400 | 300 | - 25% |
| Monterey | 227 | 150 | 200 | + 33% |
| Napa | 205 | 100 | 100 | -- |
| Oakland | 3,972 | 3,000 | 2,000 | - 33% |
| Orange County | 2,197 | 1,500 | 1,200 | - 20% |
| Redding | 190 | 150 | 300 | + 100% |
| Riverside-San Bernardino | 10,835 | 7,100 | 5,100 | - 28% |
| Sacramento | 5,284 | 3,400 | 2,900 | - 15% |
| San Diego | 3,836 | 3,100 | 2,300 | - 26% |
| San Francisco | 2,051 | 1,800 | 1,500 | - 17% |
| San Jose | 2,149 | 1,900 | 1,800 | - 5% |
| San Luis Obispo | 408 | 200 | 300 | + 50% |
| Santa Cruz | 63 | 75 | 100 | + 33% |
| Santa Rosa | 427 | 300 | 200 | - 33% |
| Stockton | 1,213 | 750 | 900 | + 20% |
| Vallejo-Fairfield | 661 | 500 | 500 | -- |
| Ventura | 796 | 450 | 400 | - 11% |
| Visalia-Porterville | 1,300 | 950 | 800 | - 16% |
| Yuba-Sutter | 372 | 300 | 300 | -- |
| State Totals | 49,609 | 35,850 | 28,400 | - 21% |
| Source: John Burns Real Estate Consulting | *-Projection |
New homes starts will remain well below peak levels in 2010, but construction activity should begin picking up in the second half of the year. Despite the declining number of subdivisions throughout California, the public home builders with an abundance of cash that do not require any bank financing will continue to build through the year. As a result, many builders will be actively searching for future community sites, and land purchases should increase from extremely low levels in 2009.
Existing Home Inventory
Existing home inventory dropped substantially in California during 2009, creating a seller’s market in most areas. We expect that inventory will remain low in early 2010 and then rise steadily as more REOs are put on the market. We have really great data on the growing gap between total foreclosure filings and REO activity, and we expect the trend to continue into 2010.
The timeline from default to REO has been extended by modification efforts, various moratoria, or even bank strategy, so banks are taking properties back as REO at a slower rate.
Affordability
Affordability will remain excellent in 2010 for the overwhelming majority of California. In particular, it will be extremely strong in nearly all central California metro areas such as Bakersfield, Merced and Stockton, and will be quite strong in many coastal locations, including San Diego, Los Angeles and Santa Rosa.
The map to the left illustrates our affordability projections for 2010, with the colors ranging from dark blue (excellent) to dark red (poor).
With the exception of Orange County, which is expected to have below-average affordability, all metro areas in California will range from excellent to fair affordability next year.
Our affordability projections are determined by comparing expected incomes and housing costs in each metro area to historical incomes and housing costs in those areas. Thus, even the expensive coastal markets can have great affordability.
Conclusion
While challenges to the California housing market and economy will certainly exist in 2010 and beyond, we expect this year to mark the beginning of the overall recovery of housing in the state. Employment growth should improve around the middle of the year, and as a result, new home sales and starts should begin to pick up as well.
Existing sales should remain fairly strong, which will help to absorb the foreclosures and bank REOs that are certain to continue.
By the end of 2010, we expect the new home market to have improved measurably from the start of the year.
Sean Fergus is a consultant at John Burns Real Estate Consulting, where he analyzes housing markets throughout the country. John Burns founded the company and consults across the country with executives in the housing and investment industries. They can be reached at sfergus@realestateconsulting.com and jburns@realestateconsulting.com.