Home prices could stay flat for an extended period before shooting up in a "hockey stick" recovery if builders can’t meet pent-up demand once excess inventories are depleted, according to some analysts.
"Don’t get caught up in the numbers" to reveal signs of a recovery in your market, said Elliott Pollack, a Phoenix-based real estate investor and CEO of Elliott D. Pollack & Co.
With homebuilding activity still near a record low, the inventory overhang in many markets is gradually being whittled away.
Once it’s gone — the timing will vary by region — markets such as Phoenix will react "like a hockey stick," with prices jumping suddenly after an extended flat period because builders won’t be able to move fast enough to meet demand, Pollack said.
Pent-up demand and low mortgage rates "are two reasons there will be a recovery — it’s sort of dealt into the cards," said David Crowe, chief economist for the National Association of Home Builders, who also sees the potential for a "hockey stick" recovery. "It’s just going to be slow because of the employment market."
Sharing their views with homebuilders at the California Building Industry Association’s Pacific Coast Builders Conference (PCBC), Pollack offered insight into the Phoenix market while Crowe weighed in on the national picture.
In three previous recessions dating back to the late 1970s, Crowe said, it took anywhere from nine to 16 quarters for employment levels to return to the point where they were at the beginning of the recession.
"We’re well beyond that already," he said, and it could be "several more quarters before we get back to the level of employment we had at the end of 2007." The lack of jobs has created "an ugly ‘death cycle,’ if you will, and that’s going to take a long time to work out."
How long?
Pollack estimated there are 40,000 to 50,000 surplus single-family homes in Phoenix alone, and that it will be 2012 or 2013 before Arizona sees growth in demand for new housing.
Household formation has plummeted as migration into the state has dwindled and existing residents double up. Utility hookups are at their lowest in 50 years, Pollack noted.
He said about 40 percent of resales in Phoenix are to investors who are "buying stuff on the courthouse steps out of foreclosure."
Investors, he said, are "doing an amazing job pulling people out of apartments — they can rent the house and make a cash return for less than what most of the apartment guys are charging for rent."
Although investors will ultimately seek to resell many of the homes they’ve snatched up at the bottom as rentals for a profit, Pollack doesn’t think that will derail a recovery.
"I think they (single-family homes purchased as investments) will bleed back into the market — there’s not going to be one day where everyone will say, ‘I’m going to sell my rental,’ " Pollack said.
Nationally, Crowe thinks about 1.5 million households dissolved during the downturn. Those families haven’t disappeared off the face of the earth — they are just unable to live on their own for the moment.
Unemployed workers and college grads who have moved back in with mom and dad will be as eager as their parents to strike out on their own again once the economy improves, he said.
"That’s another reason I’m a little less worried about the excess inventory than some economists," Crowe said.
But it will be at least a year before there’s a noticeable uptick in demand, Crowe said, and much longer in some markets hard hit by foreclosures in states like California and Arizona.
When demand does come back, Crowe and Pollack said it could prove challenging to meet. There were 865 builders in Phoenix during the boom, Pollack said, and just 133 today.
Crowe said he expects that in the 10 states where builders are struggling the most — California, Nevada, Arizona, Florida, Massachusetts, Illinois, Indiana, Ohio, Minnesota and Michigan — housing production will still be at least 70 percent below normal at the end of next year.
Builders in the top 10 performing states — Texas, Montana, Wyoming, Kansas, Oklahoma, Mississippi, Louisiana, Tennessee, Missouri and Alabama — should be back to 95 percent of normal production or more by the end of 2011, he said.
In a May 21 forecast, NAHB economists projected that single-family housing starts will rebound to 571,000 this year and 841,000 next year.
That would represent a considerable improvement from the record low 442,000 single-family starts recorded in 2009, but still fall short of the more than 1 million-homes-a-year pace that analysts say is necessary to replace aging housing stocks and accommodate future growth.
At the moment, the latest NAHB/Wells Fargo Housing Market Index shows builders remain pessimistic about the market for new-home sales during the next six months.
The index — which gauges builder perception on a scale of 1 to 100, with a score below 50 indicating more builders view conditions as poor than good — fell to 17 in June, which is the lowest level since February.
In a statement, Crowe said builders remain cautious because there are several potential impediments to recovery, including "serious problems" in obtaining financing to build new housing, "faulty appraisal practices," and competition from short sales and foreclosed properties.
Another survey of homebuilders, conducted this month by John Burns Real Estate Consulting Inc., showed sales dropped 27 percent across 1,900 communities from April to May following the expiration of the homebuyer tax credit.
The survey of 236 homebuilders in 88 markets also showed housing starts fell in eight out of 10 regions during May.
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