| Atlanta Housing Demand Remains Sidelined |
| Written by Jonathan Smoke | |
| 03.06.2008 | |
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Discuss this article on the forums. (0 posts) As I reported from Orlando during the builder show, a theme I heard oft repeated by attendees and presenters was that the media was a major source of the fear apparently sidelining home buyers at the end of 2007. I could easily jump on the bandwagon and blame the current lack of demand on the media, but to be fair, the media are simply reporting what few metrics they can easily get their hands on. Side note—if you want to subscribe to our housing market reports in order to pass along copies to your favorite media contacts, you have my blessing. Last week the Atlanta Greater Homebuilding Association hosted a panel of local market experts to provide insights into the Atlanta market. The meeting provided a venue for the media to get better information to share with their collective audiences. I decided to listen in to see what these experts thought. I’m also watching now to see how the information was received.  The message from Eugene James, director of market research in Atlanta for Metrostudy, was mixed. On the negative side he noted that the current level of inventory of new homes is above normal at roughly 11 months of supply. On the positive side he noted that closings have exceeded starts for three consecutive quarters, signaling that the correction is underway. He also noted that the months supply figure is driven by the pace of closings, so if the pace of closings picks up to more normal levels, supply will fall to more normal levels (of 8 to 9 months) relatively quickly.The view from Dan Forsman of Prudential Georgia Realty was less encouraging. Looking at existing home sales, he reported that home sales dropped 37% year-over-year in December, almost 39% in January, and was on track for at least a 40% decline in February. Dan also didn’t sound so encouraging when he identified that there were 127,000 expired or withdrawn listings in 2007, which were up significantly from prior years. All due credit to Mr. Forsman, I don’t think focusing on listings and year-over-year changes in sales helps anyone in understanding the current problem and even more importantly, when it will improve. Closings simply fell off a cliff at the end of 2007 so any year-over-year comparisons are ugly. Listings, without any perspective of vacancies, are also of limited value. I don’t think Mr. Forsman meant to be received so negatively, so maybe it was just me. His firm has produced an excellent set of material focusing on the positive conditions for buying now at www.atlantarealestate2008.com. The most helpful information to explain our current scenario and to provide some visibility of when it might turn around was presented by Dr. Roger Tutterow, economist and professor at Mercer University. Dr. Tutterow presented a complete view of the key variables impacting housing—most notably financing and consumer sentiment. Dr. Tutterow presented an enlightening series of views of commercial paper rates—the rates required for companies to sell short term promissory notes in order to get financing on transactions. As illustrated in the accompanying chart he presented, the spread on asset backed paper compared to promissory notes from non-financial companies spiked between August and December. According to Dr. Tutterow, that spike was an indication that liquidity for assets such as homes effectively froze up in December. While it is much better now, it’s still not back down to normal levels. The lack of liquidity limited the mortgage activity to only the most conservative and conforming loans. And this impacted homes that should have closed but ended up as cancellations as some buyers couldn’t get financing and others couldn’t close on their existing homes. We saw this play out on Wall Street, too. Fear and loathing about further declines in home prices was all the rage at the end of 2007. The fear was principally based on big declines in home prices in previously hyper-inflated markets like Miami, Washington, DC, and Los Angeles and in very sick markets like Detroit. Atlanta has very little characteristics in common with those markets other than we get the same CNBC feeds and the same copies of the Wall Street Journal and Fortune delivered to our doors. The clear message to Joe and Jane Homebuyer from each of the aforementioned media outlets and more was “you’d be an idiot to buy a home now.” Joe and Jane listened. Neither one likes being called an idiot. It’s clear that Joe and Jane Atlanta Homebuyer listened to the message and took it to heart, and Dr. Tutterow had the data to prove it. He also presented the first quarter 2008 Metropolitan Atlanta Consumer Confidence Results that showed how gloomy the Atlanta consumer was at the end of 2007 and so far into this year. In fact, he reported that the first quarter results declined in most areas. Consumers felt worse off financially, felt less positive about the future, felt business conditions were worsening, felt it was a bad time to make major household purchases, and felt it wasn’t a great time to buy a house. Several items in the consumer confidence survey were not as gloomy. Consumers were still feeling that real incomes were rising. Consumers felt that conditions are likely to be better for buying homes in the next six months. Finally, consumers also expect interest rates to fall. This last item is important to note as I think it is actually a negative factor when combined with the other readings. If consumers think economic and home price conditions are bad AND they think interest rates will fall further, indeed postponing a home buying decision is very rational. Interest rates have actually gone up recently. Maybe expectations of rates going up or at least not falling further coupled with expectations of housing conditions improving will be just the incentive to get potential homebuyers off the fence. To me, understanding the consumer is critical to understanding when conditions will improve in Atlanta because Atlanta doesn’t have a supply problem. It has a demand problem. And two factors are principally impacting this depressed demand: negative sentiment and lack of or limited financing. The sentiment is likely correlated with the financing difficulty, so we can expect that as conditions improve so will sentiment. If so, there should be pent up demand ready to buy. By our own calculations, Atlanta’s new home sales were 10% below what household formations, ownership rates and changes and replacements would have required in more normal circumstances. Since a home purchase decision is deliberate, planned and driven by life events, I do not expect demand to be dampened by sentiment over a long period of time. Eventually Joe and Jane Atlanta Homebuyer will recognize they should quit listening to how things are going in L.A. and New York and realize that things look pretty good at home. And when they do, they’ll see that the space, extra room, upgraded features, lower maintenance, better neighborhood and improved energy efficiency they crave are available in abundance at prices and mortgage rates that are sure to deliver value over the course of the average tenure. 
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