Robert Denk, an economist with the National Association of Home Builders, speaks at last Wednesday’s dinner hosted by the Builders Association of Greater Boston.
Boston’s housing market is better positioned for a recovery than other parts of the country, according to a forecast presented to local builders.
The low unemployment and income growth in the Boston area will help the housing market rebound, predicted Robert Denk, an economist with the National Association of Home Builders.
“The key fundamental drivers for housing are income, employment and population. If you’re not doing disastrously bad on any of those points, then you’re going to have a solid housing market,” said Denk, who spoke at a dinner hosted by the Builders Association of Greater Boston last Wednesday.
The housing markets that will struggle the most are located in areas that saw extreme price growth in short amounts of time, as well as heavy subprime lending. Those include states such as California and Florida and cities such as Las Vegas and Phoenix, according to Denk.
“These are markets that are riddled with these bad [subprime] loans. They’re going to cause trouble in the market,” said Denk, NAHB’s assistant staff vice president for forecasting and analysis. “Boston, in particular, [doesn’t] have these problems.”
The Boston area saw a sharp run-up in prices over the last decade. But Denk said those price increases pale in comparison to other regions that experienced up to 20 percent gains annually.
“When prices rise that much in a market, that’s certainly going to have an effect on demand. So this is a serious issue. Locally, the Boston market certainly had its share of price escalation but it’s still underneath what’s going on [in other areas],” Denk noted.
More than 4,000 permits for single-family homes are expected to be issued in the Boston area this year and permitting will climb to over 6,000 in 2009, according to Denk. The permitting level still will be below the peak in 2006 when roughly 10,000 permits were issued.
NAHB is anticipating a rebound in new-home building. Nationwide, single-family permitting will total 796,000 and then climb to 885,000 in 2009, according to NAHB. The permitting still will be below the peak seen in 2005 when about 1.7 million permits were issued.
“The correction that began in ’06 has pretty much played its course through ’07. We think there’s a couple of more rough quarters in 2008, but we really do believe that by the end of ’08 we’re really going to see some return to growth with maybe a possibility of gaining some real traction in 2009,” he said, speaking of the national market.
Housing starts fell 25 percent to 1.35 million nationwide in 2007, according to data released by the U.S. Census Bureau last week. The decline is the biggest drop since 1980.
Denk, however, emphasized that housing markets are local. A lot of markets are in “pretty decent shape,” and Boston is among them, he said.
“What’s going in national trends is important, and it’s valuable and it’s meaningful, but it’s not always going to help people in the local markets to really understand what’s going on there,” he said.
He later told Banker & Tradesman, “The national headlines tend to be dominated by what’s going on in Florida and California. That makes sense. These are the most populous states, so these are affecting the most people. But these are also some of the most troubled markets, with a lot of speculative activity, with a lot of subprime exposure.”
‘Recession Watch’
Home prices still are climbing in about half the states in the country, according to data from the third quarter of 2007 that was provided by Denk. The other half has reached a peak in housing prices. The Boston area has hit its peak, according to a map he showed to builders.
Denk pointed out that 44 housing markets that had peaked and turned downward went on to rebound in the third quarter.
“It’s not as though all the markets are just marching to the cliff and jumping off. Buyers definitely have been spooked by the correction and what’s going on, but as people get back out there into the market, some of these markets are just getting back to normal,” he said.
While many builders gathered at last week’s dinner anticipated grim news, another expert joined Denk in delivering some favorable economic analysis.
Jim Haughey, director of economics at Reed Business Information, said New England is currently one of the strongest regional economies.
Haughey said unemployment in the Boston area is about 3.5 percent, below the state’s and nation’s rates of 4.3 percent and 5 percent, respectively; the region’s job growth stands at about 1 percent, keeping up with the national pace; and income growth in the Boston area actually is outpacing the rest of the country. Meanwhile, Boston has seen a 7.4 percent growth in income, compared to 6.5 percent nationwide, with biotechnology and high-tech companies boosting incomes in the city.
Builders will face pressure this year. Haughey said builders should expect an increase in some construction materials, including steel and cement, as nonresidential construction has picked up. Steel costs will rise 10 percent to 15 percent this year, while cement costs will go up at least 5 percent, he noted.
Avoiding a recession is a key issue. NAHB’s Denk said government officials and economists are on “recession watch.”
“When the [Federal Reserve] meets later this month, we’re expecting Â… the funds rate is going to go down from 4.25 [percent] to 3.75 [percent]. They will meet again in mid-March. We expect they’re going to cut another 25 points then. They’ll be down to 3.5. That’s good. They are totally on the avoid or mitigate recession-watch, he said.
If the national economy slips into a recession, that will put downward pressure on job losses, more houses on the market as people relocate. “It’s just going to make things worse.”
Another risk is the credit market and subprime mortgage meltdown. “If these problems spill over and drag into ’08, that could make things just play out a little worse,” he said.
