2007 Worst Year for Local Builders in a Decade

by Alex Stenback on January 9, 2008

Jim Buchta at the Star-Tribune reports that 2007 was the worst year for Twin Cities Home Builders in a decade:

In 2007, home builders were issued 4,888 permits to build 8,961 units in the Twin Cities metropolitan area. That’s a 29 percent decline in new units over 2006 and a 53 percent decline since the market peak of 2003

Which begs the question, what’s in store for 2008?  The perennial optimists at the Builders Association of the Twin Cities have this to say:

BATC president Noonan, who is also vice president of the Minnesota division of Rottlund Homes, is optimistic that the market has turned a corner and that lower prices, builder incentives and an abundance of unsold homes will help drive buyers back into the market.

We’d like to be able to agree that falling prices and slick incentives alone will right the real estate market, but it is not quite that simple.

First, all of the conditions – supply overhang, lack of buyer/seller confidence, falling prices, and tightening credit standards – that led the builders down in 2007, still remain, and may get worse in 2008.

Second, in normal markets, falling prices stimulate demand, but in the early stages of a falling real estate market (with a huge oversupply,) price declines can have the perverse impact of making things worse.  In the same way that rapidly increasing prices stimulate demand, declining prices can reduce demand by reducing the number of people who can sell their home at a profit and buy a new one.  Falling prices also erode the confidence of buyers, who fear buying into a market that may leave them updside down and unable to sell for the price they paid.

The end game here is a darwinian test of survival of the fittest – the builders that can remain profitable while unloading their inventory backlogs at or below cost will survive to see things turnaround.

Our prediction is that the builders in the Twin Cities will look back fondly on 2007 as a good year compared to 2008.
Metro Home Builders: Worst Year in More Than a Decade [Strib]

{ 6 comments… read them below or add one }

Mike January 9, 2008 at 1:07 pm

The builder website http://www.openthedoortc.com is brutal for its biased advice. Its actually funny in an Onion sort of way for the off the mark advice it gives.

Nate January 9, 2008 at 1:32 pm

One other problem for the builders, is the continuing changes in lending.

Alot of homes were being sold with little money down, those potential buyers now often have to save a larger down payment to qualify for a mortgage.

Example: 300K home bought with 5% down required 15k saved. If the builders deeply discount that property 10% to 270K, but lenders require 10% down now, requires 27k saved.

People are having to learn how to save again. Personally I think this is also keeping a good portion of potential home buyers on the sidelines for the next couple of years.

Editor/Alex January 9, 2008 at 1:34 pm

It does read like a parody site.

Better to have a single page:

“No matter your circumstances, future plans, what you are thinking, or what you have heard, NOW is a good time to buy a home.”

I keep waiting for the trade orgs to catch on to the fact that if they actually are honest with their audience, many of them will still buy homes with their eyes wide open.

Editor/Alex January 9, 2008 at 2:19 pm

Mike – what you said, tightening condo guidelines, and the fact that with conventional Fannie/Freddie paper, if the property is in a declining market (per the appraisal), the minimum down payment goes up by 5% will wreak havoc on the lower end of the housing market.

Most of the major mortgage insurers have already deemed the Twin Cities MSA a declining market en masse…which means that even if your appraisal says it is NOT declining, nobody will insure your loan without a 5% down payment.

The credit crunch is getting crunchier.

Nate January 9, 2008 at 4:39 pm

Yeah, I’ve seen that we’re a declining market in a lot of parts of town, adding the 5% minimum down payment. Good times.

But isn’t that just the current guidelines? If 2008 turns out bad, or worse than 2007, which I tend to think it will, I think this will get raised.

The issue for the builder’s, is that this is out of their control. Drop prices if you want, it will take time for the current generation to save a down payment, especially if it’s the middle of a recession.

How can we get rid of historic inventories without lots of buyers? How can we have lots of buyers with restrictive lending and little savings?

Sven Doe January 10, 2008 at 6:47 pm

“How can we get rid of historic inventories without lots of buyers? How can we have lots of buyers with restrictive lending and little savings?”

Hmmmmm…….

What about some kind of ALL-NORTH-AMERICA-MILLION-POUND-SHITHAMMER natural disaster for the inventories, and then we could nuke the Swiss and steal their gold?

2008 looks grim.

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