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Monday, October 26, 2009
Bleak Flashback
By Richard Metcalf
Copyright © 2009 Albuquerque Journal Journal Staff Writer
It's a flashback year for home construction in the Albuquerque metro area, with building permits for single-family homes dropping to a dismal level not seen since 1981.
"Of course, America was in a deep recession in 1981 too," observes David Murphy of SalesTraq of New Mexico in his latest newsletter.
The U.S. Census Bureau reports 1,061 permits issued for new houses in the metro through the first eight months of this year, Murphy points out. With the homebuying season winding down, the metro is on track by year end to see somewhere in the vicinity of the 1,388 permits issued in 1981, he says.
The decade of the 1980s opened with a prolonged economic recession, driven largely by the Iranian Revolution and subsequent oil crisis. New Mexico's unemployment was 7.3 percent in August 1981, compared to 7.5 percent during the same month this year, according to state labor statistics.
What was really bad about 1981 was the inflation rate. It was running rampant at about 9 percent, compared to an almost flat cost of living through most of this year. Murphy notes that interest rates on a 30-year fixed-rate mortgage were in the 17 percent range in 1981, a huge obstacle to selling homes.
While 1981 was tough on home construction, 2009 is looking much grimmer. The reason boils down to a matter of scale, Murphy says in his newsletter.
The metro has close to doubled in size since 1981. Those 1,388 houses built in 1981 represented a tiny 1 percent increase in the metro's total housing stock at that time. The same number of houses built this year would be such a small increase as to be statistically insignificant.
"All this just goes to show how difficult the new home market is right now," Murphy says.
Cheaper prices
Home builders appear to be responding to the lack of buyer demand by starting to offer cheaper houses.
There were 82 floor plans available this month for houses with base prices under $150,000, more than double the 39 plans priced under $150,000 a year ago, according to Murphy. The 82 lower-priced plans are the most offered during the month since October 2005.
"We have been predicting this increasing emergence of the under $150,000 new home product for quite some time now, but only this year has it begun to really pick up," Murphy says.
The heyday of lower-priced new homes was the early years of the new millenium, when home builders embraced the low end of the market and hundreds of sub-$150,000 floor plans were available. In 2001, for example, Murphy reports 546 floor plans were available with base prices below $150,000. Four out of every five homes built in 2001 had a building permit value of $119,000 or less, according to the Home Builders Association of Central New Mexico.
Those affordable new homes gradually disappeared after 9/11 due to a host of rising costs, said Jerry Wade of Artistic Homes, a locally owned company that was the metro's top home builder from 1998-2002.
"Everybody got greedy," he said. "All these costs – land costs, impact fees, code changes, regulatory costs – just shot the hell out of it. We couldn't hit the numbers."
Another factor was the lax lending standards during the housing bubble, Murphy said in an interview with the Journal. People with shaky credit and little or no savings were suddenly qualified for mortgages to buy $200,000 houses, he said.
"The thinking was why buy a 1,000-square-foot starter home when you could buy something bigger and better," he said.
Incentives
During the heyday of lower-priced new houses, sales were boosted by low interest rates and special mortgage programs for first-time home buyers. Those programs are still around, but have been overshadowed by the First-Time Home Buyer Tax Credit.
Established by the American Recovery and Reinvestment Act, the tax credit is 10 percent of the sales price up to a limit of $8,000. Qualified home buyers claim the credit on their federal income tax return. If the buyer doesn't owe any income tax, then he or she receives the credit as cash.
"It's definitely helped," Wade said about the credit's effect on home builders. "All of us have sold some extra houses because of it."
The First-Time Home Buyer Tax Credit is scheduled to expire Nov. 30, although several proposals are under consideration in Congress to extend it.
"People in our industry are pretty optimistic that the First-Time Home Buyer Tax Credit will be extended for a period of time, six months or a year," said Jim Folkman of the Home Builders Association of Central New Mexico. "It's the only part of the stimulus plan that has worked for housing."
The Cash for Clunkers program worked in a similar manner for auto sales. It caused a spike in car and light truck sales when implemented in July. When it expired in late August, however, Murphy said sales plunged sharply to a level not seen since – once again – the early 1980s.
If the First-Time Home Buyer Tax Credit is allowed to expire, the impact could be even worse on home building in particular and the residential real estate market in general, he said.
"Brace yourselves for what could be a long, cold winter," he added.
The data
The Census Bureau is not the most accurate source for home-building permits, but its numbers are still an indicator of where home construction is headed, Murphy said. Census numbers vary from those tabulated locally by such outfits as DataTraq.
For example, census numbers through August show permits dropping from 2004 to 2005 (see graphic). But 2005 was an outstanding year for home construction. Permits were issued for 9,445 new homes, a more than 22 percent increase over 2004 and the highest annual number on record.
And 2009 is not quite as bad as the Census Bureau makes it appear. DataTrac shows permits issued for 1,166 new homes through August, a 10 percent increase over the census number of 1,061.
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