| Predicting a New “Norm” |
| Written by Jonathan Smoke | |
| 06.29.2007 | |
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Discuss this article on the forums. (0 posts) Yesterday I wrote about our analysis of the boom and downturn, and one of the most interesting findings from looking at the forecast for new homes was that for the larger markets that experienced the boom and now the bust, the levels of new home sales they will return to in late 2008 and beyond are not at the peak levels we’ve seen in recent years.  The quartile review revealed that markets beneath the top 90 would be at levels of new home sales consistent with the last several years in 2008 – 2010. None of these smaller markets experienced the boom and some have avoided any real downturn.But for the top 90 markets that account for 77% of the new home production, there was clearly a peak in 2005, a dramatic fall over 2006 and 2007, with a rise beginning in late 2007 and into 2008 to eventually reach a new level of sales closer to the 2007 bottom than the 2005 peak. Since the national summary numbers reflect what’s happening in these top 90 markets, we decided to look back at the recorded history of new home sales provided by the Commerce Department. But instead of looking at the annual numbers, we decided to take the seasonally adjusted monthly figures and turn them into a monthly absorption pace, as that’s what most of our clients care to understand when they consider a new project investment. Here’s what we found: )) From the beginning of this series to the early 1990s, the monthly sales absorption was between 40,000 and 60,000 new homes per month with several clear up and down cycles. Then after the last big housing recession ended in 1991, the pace of new home sales went up, surpassing the old 60,000 monthly pace ceiling in the mid-1990s and it looked as though things would never be the same again until 2006. The monthly pace doubled from its average over 30 years to over 100,000 homes a month at the peak in 2005. I don’t think we’ll be seeing that peak again any time soon. So the question becomes, are we entering a new equilibrium level higher than the old bands because of population and household growth, aging of housing stock, migration to the coastal, sunbelt and southwest markets, and boomers retiring while echo boomers enter their income generating years? The old band was 40,000/mo low, 60,000/mo high, and averaged close to 50,000/mo. If there is a new “norm,” it will likely be between 60,000/mo low and 80,000 per month high. The good news is that we’ve already dropped to that pace, but we may drop from the ceiling to the floor. An even more depressing scenario would be to consider there is no new norm, which would mean a further decline is in store just to get us back on the ceiling. 
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