| Hope for Improved Absorptions in the Months Ahead |
| Written by Jonathan Smoke | |
| 08.29.2008 | |
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Discuss this article on the forums. (0 posts) August is almost over, and I for one am very excited about the days and weeks ahead. The first part of this year was dreadful for anyone working in this industry. Some say the builders, developers and bankers have had the worst of this down market, but the reality is that the suppliers to housing have suffered as much or more.  I am hopeful because I see light at the end of the tunnel. For months now the key metrics on a national level have not gotten worse. Most recently home price and home sales have shown signs of minor improvement.Now we have a presidential contest heading into the final stretch and constituents on both sides seem invigorated and hopeful for a better future as a result of their team winning. I am also seeing my own evidence of activity – there are dozens of funds looking at REO portfolios and distressed new home developments. These folks have been silent for months and suddenly they want a lot of analysis done on potential investments. But nothing would improve homebuilder sentiment more than greater sales traffic, and there’s reason to believe that traffic will improve even in the non-seasonal part of the year like the fall and winter that are approaching. For one, prices have started to slow their descent or even started going up in many markets. Those who’ve been waiting for the bottom should be getting antsy, especially if their lifestyles have been begging for more space, a better location, a move out of the apartment with the noisy neighbors, a room for the baby, or to get away from mom and dad. Two, interest rates, while still at historically low levels, are showing signs that they may not be so low into the future. I plan on looking into this more next week, but in the mean time suffice it to say that when (not if) interest rates go up, home ownership will become more expensive, so locking in a 30-year rate now seems mighty tempting. Finally, the new home buyer tax credit should provide additional incentive. At a recent rally at the Georgia State Capitol sponsored by the Greater Atlanta Home Builders Association, Dr. Roger Tutterow, Ph.D. and Economist at Mercer University spoke about the tax credits’ likely impact on improving absorptions: “I think in terms of the legislation it is important to acknowledge that the $7,500 tax credit clearly will be stimulative for home absorption. We have seen this before in the mid-1970’s when we had a comparable stimulus package. We saw the home sales respond favorably to the tax incentives….
As an economist I will tell you that time and time again we recognize that consumers react to changes in relative prices. Consumers react to reductions in tax rates. There is every reason to believe that the tax credit in this stimulus package will also be positive for home absorption.” Guess what will happen if we do see absorptions increase in the fall and winter? The seasonally adjusted rate of sales, which everyone focuses on, will increase even more. That same seasonally adjusted rate is used to calculate inventory supply levels, so supply will fall more than it has thus far. Then we will enter a positive self-reinforcing cycle that attracts more traffic, stable and higher prices, and lowering inventories. Maybe it won’t happen in the condo market in Miami, and many other prior bubble markets, but there’s hope for the markets like Atlanta that are already showing signs of life. Have a safe and happy Labor Day holiday. 
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