In July nationwide new home starts fell to a 17 year low and new single-family permits plummeted to a 26 year low. Builders are still attempting to work off their unsold inventories in an environment where an uncertain economy, financially pinched consumers, huge amounts of foreclosures, and tightness in mortgage credit are all combining to make the effort extremely difficult. While the decline in starts and new permits has not likely reached its low yet, it is getting close. Single family permits, at only 584,000, are as low as they were during the double dip recession of the early 80s. This is far below the long run equilibrium level of new home absorption and will eventually push back up towards 800,000 before the decade is done. In the meantime, it is not out of the question that starts and permits will temporarily fall below 500,000 before stabilizing. In Houston, home builders are facing many of the same type of difficulties, though the magnitude of the problem is much less severe.
Requirements for stabilization of the new home market include a decline in foreclosures, which may start as early as the end of this year but will diminish quite slowly. The new home market will also need a return to normalcy of the nation’s financial markets. That’s likely to take somewhat longer with the worst yet to come. The new home market also needs home prices to stabilize. For parts of the country that will occur before the year’s end, but for many areas prices are likely to continue to weaken right through 2009.
The key to a recovery in Houston’s new home market will be a slowdown in foreclosures and a continuation of a strong economy. The former is not likely to occur until year’s end. The latter is uncertain, as the regional economy continues to slow down. Energy remains the key to Houston’s success. Excessively high energy prices will further damage the national economy, which will negatively impact half of the region’s economic base. Excessively low prices will put an end to the region’s upstream energy boom which is sustaining Houston right now. The best of all worlds would be for oil prices to stabilize around $90/barrel and natural gas prices to stabilize around $8/mcf. Local home builders should be watching these numbers along with the monthly foreclosure statistics. |