If you have ever begun to slip while going down a set of steps or missed a step on your way up and saved yourself from a very serious fall by a quick and quite strong grasp of the banister you have a pretty good idea how many of the folks who barely survived the Great Recession feel.
While the reverberations are still being felt as the ripples caused by the default of residential mortgages widen to encompass the economic viability of nations themselves, the genesis of the problem, residential real estate, has begun to calm. Given the recent strength of new and existing homes sales, rejuvenation would appear to be taking hold.
This, as with all things economic, is taking shape in a number of different ways as the survivors climb out from under the safety of their respective rocks and survey the post trauma landscape. Insight Economics' Steven Wood thinks, “Households are still worried about weak labor markets, high foreclosures, expensive energy and tight credit conditions.”
As such, and with the recovery still in its nascent stages, those who at an earlier time would be “trading up” in the housing market are staying put and remodeling instead. According to the director of the Joint Center for Housing Studies at Harvard University, Nicolas P. Retsinas, “This year could produce the first annual spending increase in the industry since 2006.”
Real-estate agents say that although remodeling spending is increasing because “people have seen their down payments kind of wiped out,” according to Jeremy Stein, a Harvard economist, the $100,000 kitchens are a thing of the past and more conservative updates seem to be the new normal. Additionally, designs for what were two-story master suites a few years ago have morphed into attic bedroom conversions.
Interestingly, the relative austerity being demonstrated by those who live in houses is not necessarily being mirrored by those who build them as PulteGroup Inc. (NYSE:PHM) had to outbid six others to win land in the Phoenix suburb of Gilbert recently. “There is an absolute land rush” was how Gregory Watson, one of the “P’s” at McKinley Partners, a CA-based real estate fund put it.
The parcel that Pulte purchased was an 88 “finished lot” piece with sewers and streets in place allowing the actual home building to happen quickly. Another attribute to the “Lyon’s Gate” community was its easy commute to downtown Phoenix.
Demand for land with these same qualities has driven finished-lot prices up over 20% on average from the early 2009 trough according to housing research firm Zelman & Associates, with lot prices in Phoenix and Southern California’s Inland Empire up more than 60%, while Sacramento, Orlando and Los Angeles have seen 30%-40% increases.
The reasoning behind all of the buying according to Jim McNeil, CEO of law firm Akerman Senterfitt’s national residential development practice is that, “The builders think this thing has turned and they’re making sizable investments in both finished lots and raw land.” “We’re talking about a significant turn here,” he said.
While the bubble was still being blown, the irrational exuberance extended across the whole housing spectrum - buyers, builders and bankers all feeding off of the easy money flooding the economy and Washington’s desire to have everyone own a home whether they could afford it or not.
With the economic revival relatively new, let’s hope the fiscal responsibility seemingly now instilled in the individual is enough to prevent anything from growing so big that it needs to be popped anytime soon.
Enjoy the week.