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New home market "anemic"

By John Rebchook, Rocky Mountain News (Contact)

Published February 6, 2008 at 11:43 a.m.
Updated February 6, 2008 at 11:43 a.m.

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Last year was a tough one for the new home building industry in the Denver-area, as well as nationally, but a report released today indicates the market may be starting to recover.

"While the new home industry wrapped up 2007 on a weak note, there are indications that the bottom of this housing cycle may occur in the next few months," said Mike Inselmann, president of Houston-based Metrostudy, a national housing tracking and consulting company.

"Builders are steadily whittling down excess inventories, interest rates have recently declined again to near-historic lows, and there is sentiment that housing prices will stabilize by mid-year," he added in a statement.

"Home prices in many markets are as low today as they are likely to be for the next decade," he said. "And with the low interest rates and low prices, housing affordability is improving in many areas of the country."

Despite the lengthy housing correction, job growth continues to illustrate the underlying strength of the local economy, said John Covert, director of Metrostudy's Denver division.

According to the Colorado Department of Labor & Employment, the Denver-Aurora-Boulder MSA added 22,000 jobs during 2007, for an annual growth rate of 1.7 percent.

"Job growth is expected to be about 1.5 percent, which would mean 20,000 new jobs," Covert said in a statement. "This will help the housing market absorb the high levels of existing home and new home inventories."

Denver's unemployment rate remained low at 3.9 percent in December, compared to 4 percent the previous year and compared to the national unemployment rate of 5 percent.

"Denver's new home market continued to post anemic numbers through 2007, a necessary contraction after the overbuilding of previous years," Covert said. "After peaking at more than 20,000 annual housing starts in the fourth quarter of 2005, the market began to slow. The contraction is expected to continue until the end of 2008, when housing starts should begin to outpace new home closings, thus indicating the market's return to growth."

The Denver metro area recorded 1,611 new home starts (attached and detached) during the fourth quarter of 2007, the lowest number of quarterly starts in seven years.

The annual starts rate declined 36 percent from the fourth quarter of 2006, to 10,135 units at the end of 2007.

Single-family quarterly closings totaled 2,841 units in the fourth quarter, a 32 percent decline compared to the fourth quarter of 2006.

The annual closings rate was 11,826 units, a 33 percent decline compared to the prior year. Annual closings outpaced the number of homes started in the 12 months ending in December 2007 by 1,691 units.

"Although the gap between starts and closings narrowed during the fourth quarter, the current market correction will continue through 2008, as builders grapple with inventories and slow demand," Covert said. No county in the Denver metro area has been immune to the housing slowdown, Covert said.

The more suburban areas have seen the steepest decline in new home starts. Douglas, Arapahoe and Adams counties have been the hardest hit during the last two years, partly because of the heavy concentration of national builders' programs focused on single-family detached production.

While Denver, Broomfield and Boulder and portions of Arapahoe County have experienced declines, they also have captured market share from the suburbs, increasing from 17 percent in 2005 to 23 percent in 2007.

Single-family detached home inventory, which is composed of units under construction, finished vacant units and model homes, dropped for the seventh consecutive quarter to 4,629 units, Covert said.

Inventory of homes under construction fell to 2,499, by far the lowest level in five years. The months of supply of homes under construction dropped to 4.2 months, which is within equilibrium.

However, finished vacant inventory, perhaps the most fundamental indicator of market strength, remains problematic, Covert said.

At 1,543 units, the Denver-Aurora-Boulder metropolitan statistical area had a 2.6-month supply of finished vacant homes at the end of the fourth quarter of 2007. Supply has increased steadily since late 2005. A market that is balanced between supply and demand would have about 2 months of supply in this MSA. Most builders have reduced prices through aggressive incentive campaigns during this housing correction.

The Denver metro area is not as affordable as it once was, Covert added.

As of the fourth quarter of 2007, 26 percent of detached annual starts were for homes priced below $300,000, compared to 47 percent in 2005.

Lot development slowed dramatically during the past two years, Covert said.

After delivering more than 14,000 lots for detached single-family homes in 2005, developers slowed to 10,580 lots in 2006 and 5,672 lots in 2007, a 46 percent decline in one year. Yet the relative supply of lots climbed to a 43-month supply based on the absorption rate.

Metrostudy considers a 16- to 18-month supply of lots to be at equilibrium for the Denver market.

"Even though the national economy was slowing at the end of 2007, the local economy showed signs of strength in its positive job growth and low unemployment," Covert said. "The economies of Colorado and the Denver metro area appear to be more stable than many other areas around the country. Personal income in Colorado increased 1.5 percent at the end of the fourth quarter of 2007 compared to the third quarter. Despite these positives, recovery in the housing market will take time."

Comments

  • February 6, 2008

    7:27 p.m.

    Suggest removal

    WarrenJimmyBuffett writes:

    Is this an NAR fluff piece? Too bad foreclosures are at or near record highs, financing is much tougher to get and you actually need money down, inventories of existing homes are piling up as sales pace is slow, at best, and the national economy is entering a severe recession that will cause job contraction (yes, even in Denver -- remember the late '80s and early '90s?). Metrostudy either appears clueless to me or they are being "forgiving" on their forecast, because the majority of their clients are homebuilders. This misinformation will hurt mainly the people tricked into buying, and I think that is wrong. The bottom is likely somewhere in 2010 and expect home prices and sales to stay sideways for a couple years after that. Buy now, lose money.