The Housing Turnaround

As this recession appears to be hitting bottom, local economists are predicting that Utah is nearing the end of the housing crisis.

 

Several factors have come together to create an environment that will nourish a recovery in the housing market, said Kelly Matthews, executive vice president and economist at Wells Fargo.

 

As construction has slowed in Utah (single-family building permits were down from 20,000 in 2006 to nearly 5,500 in 2008 according to the Utah Construction Information Database), the demand for housing has continued to grow as the number of households in the state continues to increase, albeit at a slower rate, Matthews said.

 

James Wood, director of the Bureau of Economic and Business Research at the University of Utah, said projections put the number of new households at 29,000 this year. But Wood said that estimate is too high since net in migration has dropped significantly due to an unsteady job market and some households have combined due to job or home loss. But growth is still going to happen.

 

Matthews predicts, despite the loss of net in migration and the meshing of households, that the natural population will continue to grow, creating at least 10,000 new households in Utah this year.  And every newly created household will fill an available home or apartment, decreasing the supply of current dwelling units and making it necessary for construction to resume in the residential sector.

 

Wood would agree. He said he believes Utah has already reached a point where its natural population growth is creating a need for new homes.

 

“From the demand side, I would argue that we simply need to build more dwelling units,” Matthews said. “There is a population out there that ultimately has to have a place to live.”

 

The population growth will play a significant role in filling vacant homes, but Matthews said an increase in affordability will also be an important factor in the recovery of the housing market.

 

More than a year ago Matthews predicted that affordability, which he says was a central factor to the demise of the housing sector, would need to be restored before the housing market could recover. He forecasted that a 20 percent average sales price reduction would be necessary to restore affordability to the housing market.

 

Since Matthews’ analysis, home prices, especially in Salt Lake County, have dropped on average by 10 percent. While this is only half of what the economist predicted, Matthews said declining mortgage rates (now down to around 4.75 percent) combined with the average sales price reduction have pushed affordability rates back to levels that occurred in 2004.

 

In addition, programs like the $8,000 First-Time Homebuyer Tax Credit and the $6,000 Home Run Housing Grant for homebuyers who purchase a newly constructed, never-occupied primary residence in Utah have increased affordability even more, Matthews said.

 

“Combine those two incentive programs with these incredibly low mortgage rates … (and) I believe it becomes an attractive environment for many people to buy a house,” Matthews said.

 

Those who have cashed in on the Home Run Grant would agree. The grant, according to Grant Whitaker, president and chief executive officer of the Utah Housing Corporation, is getting many would-be homebuyers (467 of them) off of the fence and putting them in the 2,900 newly constructed homes that were vacant at the end of 2008.

 

“The purpose of the grant was to entice people to purchase new homes. The benefits of that will be multiple,” Whitaker said. “Homebuilders can start building again. (And) it will stabilize home prices for newly constructed homes and for the existing home inventory.”

 

The frenzy of home buying spurred by the Home Run Grant will help stabilize the housing market by satisfying supply with demand, Whitaker said.

 

“It is not going to do it all,” Whitaker said. “But we believe it will be a major contributing factor to getting things back to a more normal status.”

 

The employment rate, although lower than usual, will also help to get things back to normal, Matthews said. For those Utahns who are still employed — nearly 95 percent — Matthews believes that the opportunity to purchase a starter home or a bigger home (those million-dollar homes that are selling at incredibly reduced rates) couldn’t be better.

 

“I think we’ll be surprised in this interest-rate environment and with the decline in prices that some of these (million-dollar) homes will move this summer faster than we have anticipated,” Matthews said. “Certainly we won’t get the whole problem solved this summer.”

 

Although Matthews is not predicting a complete recovery in the coming months, he suspects the problem will be fixed in the near future. Even recent sales, construction and foreclosure data from March showing a continued slowdown cannot dampen Matthews’ predictions.

 

“This analysis is not evident yet,” Matthew admitted, “(but) somewhere in the second quarter it will become evident. “

 

Woods, on the other hand, predicts a few more months of bottoming out, with growth in 2010. And although “2010 won’t be a gang-buster year,” Woods believes it will mark the end of a five-year housing contraction.