New builds remain up in GT County; other counties down
Slowing housing markets won't derail the economic expansion as our industry transitions away from the major growth engine it's been over the past several years.
Single family home sales, which are down about 10 percent nationwide for this quarter, will move down further, but will not by any means constitute a collapse of the housing sector. We are undergoing an adjustment from a period of unsustainability as investors pull out of the market.
In Grand Traverse County, using the year 2000 as our baseline, our market for new home construction for the past six years has experienced significant growth, especially in 2003 through 2005, which saw a sustained average of 43 percent. Year-to-date, new home construction remains on track for another strong year.
Conversely, in the surrounding four-county area of Antrim, Benzie, Kalkaska and Leelanau, most of the counties saw a mild peak in new home starts in 2003, but have since experienced a moderate but steady decline. Antrim has experienced the most significant overall decline in new home starts-a 54 percent decline since 2000.
Although the Fed elected not to raise interest rates in August and there are only minimal signs of inflation other than energy costs, it's reasonable to expect that housing will not continue to make the same contribution to the economy that it has.
But when I think about where the economy is-I think we're in the 5th inning with a good chance of going into extra innings-this expansion we are living in may prove to be the longest one ever seen. Ostensibly, I think we can all agree that job growth and productivity gains will help keep the economy on track as housing markets simmer down to healthy and sustainable levels.
With this in mind, who is the buying power behind new home construction-who defines our market? Within five years, half of all households will be headed by people age 55 or older. These households have 57 percent of the net worth and hold 58 percent of the residential equity in the country.
The NAHB says that by the year 2014, the number of 55+ households in the country is expected to grow to 51.6 percent or 65.8 million households. Moreover, 13 percent of 55+ households own second homes, compared to about 8 percent for younger households. Second home ownership peaks at ages 55-64, reinforcing the conventional explanation that many in this age group buy homes to eventually retire in them.
But wait. The boomers are not the only strength defining the new home construction market. Here come the echo boomers, born between 1982-95. Besides graduating from college, getting their first jobs, getting married and starting families, they are buying homes. This is the generation that will be demographically pushing the market for the next decade. This potential market is 75 million strong.
In addition to the sheer number of echo boomers entering adulthood, affordability has helped more buy their first home. Historically, the biggest obstacle has been the down payment and closing costs. But because we have had a virtual explosion of mortgage types, 43 percent are purchasing with no money down, according to the National Association of Realtors.
It's a Buyers' Market
For young adults who have not reached their earning potential, that is a big advantage. The slower market actually benefits them because there are more choices in the market today and spec home builders may have to adjust expectations. Spec home builders will need to become more realistic about what they can get for their homes.
The Federal Reserve Board estimates that homeowners have a net worth nearly 36 times more than that of renters. Rental housing cost has increased an average of three percent annually in the last 10 years and average rents are projected to increase 4.1 percent this year, according to the Federal Reserve.
By contrast, a $210,000 home bought today with a down payment of $10,000 and a 30-year, fixed-rate mortgage of 6.5 percent would cost $1,100 per month and yield a net worth of $138,521 after 10 years, assuming a historic 4.5 percent annual appreciation rate, according to the Federal Reserve Board.
Clearly, for the echo boomers, the incentive exists to buy rather than rent. And if done right, building the "affordable home" does not mean compromising the quality of construction. The key is working with a reputable, licensed and insured builder and design and financial teams to understand all the important elements that must be considered in meeting budget and design goals.
On the multi-family side, it's expected the rental market will regain some ground while red-hot condo markets start to cool. National Association of Home Builders (NAHB) Chief Economist David Seiders believes his home-price forecast shows continuing deceleration in terms of the rate of growth, going from about 12 percent in 2005 to about four percent this year. And he is predicting that residential remodeling expenditures will remain on an upward trajectory, in part because "…an immense amount of home equity will continue to support this spending."
Mike Ferraro is president of the Home Builders Association of Grand Traverse Area and owns Ferraro Construction. BN