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| Is Every Market in a Downturn? |
| Written by Jonathan Smoke | |
| 06.28.2007 | |
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Discuss this article on the forums. (0 posts) The news on home sales and home prices this week clearly has not been good. But, tired of hearing the same old reports about May vs. April or last month this year vs. the same month last year, we decided to try some different takes on the market to help discern where the bottom may be and just how widespread this downturn is.  From specific project research we had recently conducted for clients and from looking at our recent forecast report for many different markets around the country, I wasn’t really seeing the same pattern of downturn and bottom consistently, but yet the national numbers seem to be saying each market in the country is in the same boat.So we ran an analysis of forecasted new home sales and permits for all markets and averaged them and what we saw was no distinct downturn. Since we didn’t weight the MSAs for size of market and therefore treated all 361 as an average, I began to believe that size of market may be what is at play here. So we ran our proprietary forecast of new home sales based on fundamentals for quartiles of markets based on the level of 2006 single family permits. Therefore, the top 90 MSAs were in the first quartile, 91-180 were in the second, etc. Each quartile represented the average forecast for the MSAs in that quartile. Here’s what we found: )) Several things are striking about the top quartiles: the peak in 2005, the dramatic descent in 2006-2007, and the “new” lower equilibrium reached in late 2008 and going forward. That new forecasted equilibrium is closer to the current bottom that the 2005 peak. Stay tuned for a follow up on this notion. So what does this mean for housing? According to our forecasts, the bottoms should be reached in 2007, but for many smaller markets there really isn’t a bottom. There have likely been declines in sales in most markets because of the massive media attention on falling home sales and prices, but the reality is that there are at least half of the MSAs in the country that saw no boom and that currently are seeing no bust, except what is being reported in the news. By the way, it’s not a surprise that the public builders are suffering. The majority of public builders operate in the top 50 markets in the country. In markets outside of the top quartile defined here, you’d be hard pressed to find one, let alone two or more, public builder represented. This strategy is sometimes necessary for scale reasons, but it certainly paid off big in the boom. Granted, the top 90 MSAs in the country account for 77% of the new home production (based on 2006 figures), so we aren’t dismissing this downturn. What we are saying is that location matters for housing investments, so be careful about the numbers you watch for insight. 
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