Home-Building Market Overview

What is happening with the home-building market? That is a question that I am getting mroe and more in my travels about the country. Here are a few market insights. A better explanation for the intensive rise in home prices would be that many people transitioned their wealth from the stock market in the dot.com era to real estate. Many stock investors were flush with cash even after the stock market corrected in year 2000. We believe this was one of the main culprits for the wild run-up in real estate prices over the past four years. Indeed, low interest rates played a strong role in the run-up, but there were many market forces in play.

Single Family Homes

Single family unit dwellings have continued to remain strong through the first half of 2005. In May 2005, single family permits rose to 1.7 million and rising to 1.9 million in June 2005.

The single family home permits is particularily strong in Sunbelt states where the climate is warm. This includes Florida, Texas, Arizona and Southern California. We believe building permit strength in this region is influenced by demographic changes. When baby boomers are retiring, they will increasing opt for geographical destinations where the weather is warm.

There are a number of notable reasons for the strength in single family home buying. First, the historically low interest rate environment has enabled first time buyers to qualify for a purchase. Second, an increase in the number of minority and foreign home buyers has kept the market relatively hot. Third, in recent years there's been an abundance of single woman that have entered the market who are buying new homes at record numbers. Fourth, a large part of the market is purchasing a second and third home for purely investment or speculative reasons.

Each of the factors has kept single family homes sales strong which can be directly linked to historically low interest rates.

Multi-family Homes

The multi-family housing market includes apartment units. In 2003, multifamily construction starts rose 0.8% and 0.7% in 2004. We believe overall growth levels will remain weak throughout the United States except for impacted markets where there's a lack of available land or areas where there's severe reduced affordability. The national vacancy rate was 10.4% in 2004 which remains at relatively high levels.

This sector could received increased activity due to the lack of home affordability in many regions of the United States. This has been particularly acute in coastal valley areas near the ocean. Apartment rental vacancies have a tendency to be weakest in markets where the home affordability index is above 90. Since homebuyers cannot qualify for a home in these markets, they opt to rent in the geographical regions. And this keeps apartment vacancy rates extremely low. This is particularly evident in areas such as San Diego, California and San Francisco, California.

We believe the multi-family unit market could experience an upturn due to the lack of affordability in many geographical markets and expectations of continued growth in housing prices. Thus, it may now be cheaper to rent a home than to buy a home due to the irrational exuberance of home price growth. In addition, higher interest rates will make homes less affordable which could increase demand for multi-family housing units.

Manufactured Homes

The manufactured housing market remains subdued. Shipments have plunged for four straight years from 2000 through 2004. In 2000, shipments declined to 250,550 units. In 2004, shipments were about 127,000 units. This represents a decline of 50 percent in four years. Shipment declines are largely the result of excessive inventories which caused the fall off in units shipped.

The manufactured home market experienced a spike in repossessions that impacted the market. lenders began tightening credit standards. This caused the industry to lose sales and reduce shipments. In addition, low interest rates encouraged many consumers to purchase site-built homes instead of manufactures homes.

Since the market is more inclined to attract sub-prime customers, there is likely to be an increased number of foreclosures in the manufactured home market. And this increases financing costs as compared to conventional mortgage loans. The market could return to more normal levels wih a spike in interest rates which could encourage more consumers to seek manufactured homes.

Want to know more? Give Don Iannone a call at: 440.449.0753, or send him an email at: dtia@don-iannone.com for a price estimate on a full Home-Building Market Profile Report.