Our housing and construction market…what lies ahead

Home sales and new home construction turned in a sub par performance during the final three quarters of last year, which helped contribute to the decreased annualized growth of the real gross domestic product (GDP). The five-county area essentially mirrored the national performance.

What is particularly noteworthy is the activity within Grand Traverse County. For the past five years, Grand Traverse County has demonstrated sustained growth in new housing starts and during the first quarter of 2006 was on track to continue this trend. This stalwart performance bucked the surrounding counties performances which have demonstrated a consistent decline since our baseline year of 2000.

But must all good things come to an end? Grand Traverse County did an about-face resulting in a 30 percent decline in new housing starts during 2006. So significant an event that it prompted layoffs of inspectors within the county construction code office.

Of the total homes listed annually, an average of 45 percent of homes sold in the five-county area since 2000. In 2005-06, a record high number of homes were for sale (5,781 and 6,146, respectively), but only 37 percent were sold in '05 and and 30 percent in '06. The average sales price of these homes was $234,000.

The supply chain

At last month's Home Building Expo, sponsored annually by the Home Builders Association of the Grand Traverse Area, attendance was fairly consistent with recent years. Noteworthy, however, was the anecdotal comments by vendors (builders and suppliers) that the "quality of leads" were much improved over the last two years.

The "big boxes" (Home Depot and Lowe's) nationally have experienced a decline in sales, thanks to the slowing housing market, significant deflation in lumber and plywood prices and tough comparisons to last year, when rebuilding efforts were underway after an especially damaging hurricane season. On top of the housing market downturn, the fourth quarter is seasonally the weakest for home-improvement retailers as the colder weather typically results in fewer building and renovation projects.

Buyer demand

Builder confidence continued to rise in February, according to the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) released last month. The HMI increased from 35 in January to 40 in February, up from a low of 30 last September and the highest level since June of 2006.

"Builders are still cautious as they continue to manage their inventory, but their assessments of the demand side of the single-family market are improving," according to the NAHB. "Every component of the February HMI-present home sales, sales expectations for the next six months and buyer traffic-showed a significant positive uptick in February."

Lower energy prices, favorable mortgage rates and solid growth in employment and household income have all contributed to the recent stabilization of home buyer demand, Seiders added.

"In addition, builders continue to offer substantial sales incentives to move their product and limit cancellations, which has helped to firm up buyer demand."

Spec homes

Amid brightening hopes that the U.S. housing market is stabilizing, some economists are zeroing in on a piece of data that could suggest otherwise: the homeowner-vacancy rate. This often-overlooked figure, a measure of how many homes for sale are empty, is at its highest level in 40 years. This report, which usually gets little attention, sparked fresh concerns about the housing market. One may conclude that rising vacancies signal that excess housing supply continues to grow, and that new construction has to drop further. One may immediately conclude that the excess supply of vacant housing stock could erode home values as sellers slash prices to move vacant properties. But so far, it has not. In fact, the median home prices nationally were up 1.1 percent in 2006.

This area's spec home vacancy rate and number of existing homes for sale would temper your outlook for new construction. Everything I read leads me to forecast largely flat new housing starts this year followed by a strong rebound in 2008. After all, 2008 is an election year. There clearly are uncertainties about how this is going to work its way out. I would caution spec home builders not to ramp up in the near future.

Our area's market

This area's growth in new housing starts lies with Boomers. 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.

For local builders, the key is attracting the right demographic…which for now would exclude the masses impacted by our auto industry. Those attached to the auto industry are burdened with homes to sell in a distressed market that is over-inflated with available homes and declining values. We build custom homes and most of our clients are considered Boomers-but few are from southeast Michigan. Many hail from other regions in Michigan, as well as Ohio, Illinois, and the east coast.

Mike Ferraro is president of Ferraro Builders and past president of the Home Builders Association of the Grand Traverse Area. BN