Another View: A Challenging Year Ahead
California Builder assembled a panel of housing experts to forecast the 2009 outlook for California. Read all five pieces.
• A Perfect Storm - Alan N. Nevin
• A Brutal Economic Cycle - Jonathan Dienhart
• Market Woes Compound Housing Problems - Richard K. Green
• A Challenging Year Ahead - John Burns and Chris Porter
• Declining Homeownership Key to Recovery - Kirk Lesh
By John Burns and Chris Porter
As we pen this article, the U.S. economy and stock market are in a death spiral. In our opinion, it is too late for government intervention to stabilize housing in the first half of 2009. At this point, only massive government intervention can stabilize the market by 2010, and 2011 is our most likely scenario (the same timeline we outlined in late 2006).
There are four key initiatives that we assume the government will adopt, but these are far from certain:
• Stabilize the banking system at minimum taxpayer expense. There is a lot more to do on this front as Option ARMS and Commercial R.E. loans mature over the next two years.
• Stimulate job growth. We believe the unemployment rate will rise 3 percent in 2009.
• Stimulate responsible home buying. Support mortgages to high-credit consumers with a down payment of their own, an additional down payment from the government (such as the tax credit that has already passed), and low mortgage rates.
• Support the private sector, which will deal with loan modifications.
These four initiatives will result in stabilized demand, supply and affordability.
2009 will prove to be another challenging year for the homebuilding industry in California, largely due to the job losses that we expect to occur over the next year. On top of an expected 1.2 percent job loss in 2008, we are forecasting a loss of 2.8 percent in 2009, which will keep the demand for new housing at very low levels. For the state, we are forecasting a 22 percent decline in new home sales activity in 2009 from already very low levels, but we expect that to be the trough of this down cycle.
Resale activity, on the other hand, already showed some improvement in late 2008 – due largely to the high levels of foreclosure sales occurring today – and we expect this improvement to continue into 2009. Our outlook is for an 11 percent improvement in resale sales transactions in 2009, with a greater surge in sales activity in Southern California than in the northern half of the state.
Foreclosure sales are helping to set the new, lower market price, and we expect a decline of approximately 17 percent in the median resale price in 2009, even as the resale volume continues to improve. We see essentially no improvement in prices until 2011 and, even then, only minimal gains. Price recovery will vary by market and submarket, but we generally expect to see stabilization occur first in the coastal markets, with some inland markets not bottoming until 2011. Mature locations that are close to work and in great school districts will tend to stabilize first.
Permit activity has fallen to its lowest levels in at least the last 25 years in many California metro areas. We believe there is a chance that 2009 will bring some improvement in construction activity, driven by the property owners and lenders funding the capital to finish improvements in order to generate as much recovery of their investment as possible. However, since all of our clients tell us that they intend to build fewer homes in 2009 than in 2008, and the banks seem to be moving very slowly, we believe it is more likely than not that single-family permits will fall in 2009.
In summary, pray for a great year but plan for a bad one. Be optimistic about the future, however. Land will be cheap. Housing will be affordable. Household formations continue. California is one of the best places in the world to live.
The authors work for John Burns Real Estate Consulting. Burns can be reached at jburns@realestateconsulting.com. Porter can be reached at cporter@realestateconsulting.com.