Research to Build On

By: Rick Palacios
John Burns Real Estate Consulting

Times of hardship should motivate our industry’s leaders to ready themselves for when the market begins to recover.  Forecasts, however bleak they may seem right now, play an integral role in the preparation stages, helping us identify the ever-elusive bottom of the market.  Comprehensive research is a must at this stage in the housing cycle.  By focusing on research now, you can ensure that your business will flourish over the long term.

Below are five indicators that we believe everyone in the housing-related industries should be monitoring to help their business succeed.

1) Job Growth:
Job growth is the primary determinant of the demand for housing, and thus a very important indicator to watch.  The overall job market got off to an unpromising start for 2008, with the U.S. economy experiencing its first monthly decrease in January in more than four years.  But not all housing markets are in economic peril, with some markets still bucking the trend and continuing to experience healthy job growth.  Continue to monitor employment trends in each of your markets, as well as other markets where you feel opportunistic investments may arise.       

2) Supply: 
The unsold housing inventory is much too high – at 10 months of supply in both the new and resale home markets nationally and needs to decline significantly.  We believe that a healthy level of supply is closer to 4-6 months in the major housing markets.  Aside from monitoring usual resale/new home supply metrics, pay close attention to foreclosure activity.  A peak in foreclosure activity will be significant for our industry, indicating that excess/speculative investment properties are beginning to be flushed out of the system.           

3) Sales Volumes:
In a number of markets that were among the earliest to enter the down cycle, we don’t believe sales volumes can possibly fall much lower, and expect to see initial signs of recovery in the coming year.  Both existing and new home sales volumes have plummeted in this down cycle, falling to their lowest levels since 2000 and 1995, respectively.  Sales volumes will serve as one of the first signs of a recovery in the overall housing market.   

4) Sales Price:
Watch for price stability in the new home market first.  New home prices have been freefalling since early 2007, while resale prices have just recently begun to plummet.  Builders have done a better job of marking to market, something that existing homeowners are often unwilling to do.  Therefore, home builders have the upper hand in terms of value, a fact that should be emphasized whenever possible.   

5) Mortgage Trends:
In addition to rate fluctuations, we suggest monitoring loan-to-value (LTV) ratios.  Everyone knows that interest rates are still low in comparison to history.  However, this fact is irrelevant if credit guidelines limit the number of people that can actually qualify for a loan.    High LTV ratios were common up until 2005-2006 but have declined since.  As lenders begin to grow more confident that prices have stabilized, LTV ratios should begin to steadily increase, pointing towards a recovery and overall confidence in the market.       

Conclusion:
Housing is a cyclical business, and the current downturn will be followed by a period of recovery, which will provide great opportunities for the builders and industry participants who are well-prepared.  Monitoring key trends and forecasts will help you to navigate both down and up cycles and enable you to mitigate some of the inherent uncertainty in the home-building industry.

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RICK PALACIOS
Research Analyst

Prior to joining John Burns Real Estate Consulting, Mr. Palacios worked as a Sr. Analyst for RSM EquiCo, the investment banking division of H&R Block. Additionally, Mr. Palacios has worked as an International Trade Specialist for the U.S. Department of Commerce. His experience includes extensive market research, international trade and financial analysis. Mr. Palacios double majored at the University of California, Irvine, receiving a B.A. in both Political Science/Economy as well as International Relations. 

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John Burns Real Estate Consulting helps their clients determine strategies, make decisions and monitor real estate market conditions. Our Building Market Intelligence TM consulting process helps bring clarity to the decision-making process. (shown here: John Burns, President)

John Burns Real Estate Consulting Headquarters: 4000 Barranca Pkwy, Ste 250, Irvine, CA 92604  Office (949) 870-1200 Fax (949) 870-1299 www.realestateconsulting.com