Headlines – Week of December 5, 2010
December 17, 2010
Using data from Moody’s Economy.com, Forbes identified the top-10 states where more residents are leaving than arriving.
The 10 states that have said goodbye to the most residents are:
1. New York
8. North Dakota
9. South Dakota
Underbuilding in the Single-Family Housing Market
After 2005, the U.S. housing market experienced a downturn unlike any other seen in the post-World War II era.
According to a special study by economists at the National Association of Home Builders (NAHB), annual single-family housing production in 2008 and 2009 fell about one million units short of the housing that would be needed in a normally functioning economy. The report, “Extent of Underbuilding in the Single-Family Housing Market,” found an excessive amount of single-family building from 2003 through 2005. But overbuilding largely ended by 2006, and the subsequent downturn was severe enough to more than offset the annual surpluses. This year (2010) is likely to add to the growing deficit of single-family homes by another one million units, according to the report.
From 1979 through 1999, the U.S. averaged 938,000 new single-family building permits and 1.05 million single-family starts. A large part of the average gap between single-family permits and starts is due to the early part of this history, as the two series have tracked each other much more closely in recent years (Figure 1).
Permits were used instead of housing starts because they are based on a much larger sample and provide more geographic detail, which enabled the study to be extended to the state level.
The analysis compares levels of single-family permits in recent years with the long-term trend that would be seen if housing, labor and credit markets were functioning normally and generating a normal rate of household formations.
Single-family permits plunged to a trough of 441,000 in 2009, their lowest level since World War II. The previous post-war low occurred in 1981, when 550,000 single-family permits were recorded. Adding to the magnitude of the recent downturn, multifamily starts and permits last year fell below 150,000 units, an historic low, compared to about 400,000 units annually during the early 1980s.
From 1988 through 2003, the U.S. population was growing at a fairly steady average annual rate of 1.15 percent and varied only between 0.90 percent and 1.35 percent. During the recession, household formations slowed markedly below this pace, delaying two million household formations. The deficit in new single-family homes can continue as long as household formations remain depressed.
Over the 1988-2003 period – which goes right up to the housing boom years of 2004 and 2005 and can be considered a fairly normal one for housing – the number of single-family permits issued was increasing at an average of about 36,000 per year, consistent with a growing population that needs housing and an expanding inventory of older homes that need to be replaced.
Subsequently, however, permits dropped to under 1.4 million by 2006 – already slightly below trend – and continued to fall through last year.
Single-family surpluses occurred from 2002 to 2006 and they were well over 200,000 annually in 2004 and 2005. Deficits, which began to materialize after 2005, reached about a half a million units in 2007 and one million every year since then as single-family permits dropped below 500,000 – more than a million units per year below trend.
Accumulating annual surpluses peaked at 493,000 single-family units in 2005, and that was worked off entirely by the end of 2007. Depressed levels of single-family housing production resulted in a cumulative deficit of 2.17 million units by 2009 and will likely grow to 3.28 million by the end of this year.
The study also found that there are now single-family housing deficits in most of the states. This includes the states that had the hottest markets during the boom: Arizona, with a deficit of 144,500; California, 49,500; Florida, 112,600; and Nevada, 75,600.
Steady improvement predicted for commercial market
According to two economists at the Economic Issues and Commercial Real Estate Business Trends Forum at the 2010 Realtors® Conference & Expo in New Orleans, while still experiencing challenges, the commercial real estate market could see signs of steady improvement in the near future, specifically concerning lending.
The predictions surrounding the commercial market, indicate a slight improvement in commercial lending as banks’ profits return to healthy levels. Although capital flow into the commercial real estate market has been very selective in order to achieve a full recovery, lending practices must improve.
In addition to capital flow, the commercial market depends largely on job creation. Since the beginning of 2010, 1 million jobs have been created, but the country needs to create much more than 100,000 jobs per month to have a meaningful impact on vacancy rates.
Another challenge affecting the commercial market is corporate profits versus business spending. While corporate profits have returned to normal, companies are still not spending as consumers and companies are still unsure of the future economic climate.
A majority of the commercial real estate sectors are still experiencing hardships with office and retail vacancies continuing to rise, however, with imports and exports in the U.S. rising, the demand for industrial space will improve. The only sector continuing to perform well is multifamily. Vacancy rates for multifamily properties are falling and rents are expected to rise as homeownership rates fall and people postpone home purchases.
The 2011 commercial forecast shows steady improvement in the market with rents stabilizing and net absorption slowly improving. The economists at the conference predict a moderate GDP expansion of 2 percent to 2.5 percent in the next two years and an unemployment rate of eight percent in 2012 and six percent in 2015.
Posted by Scott R. Lodde