The Healthiest Housing Markets for 2009

Builder, in conjunction with Hanley Wood Market Intelligence, debuts its metric for determining markets with the best and least potential.

With most economists and builders expecting a national market decline this year, this may not seem like the best time to be selecting the “healthiest” markets in the country. Virtually every market was down last year. But a close look at the numbers reveals that some markets have way outperformed others during the last four years and are likely to continue to do so this year.

When the housing market stages its official recovery, the markets listed on the following pages are likely to lead the parade. It may take a year or more for the weakest markets–where burgeoning foreclosure sales are still pounding new home values, making building and selling new homes an exercise in futility– to finally stage a turnaround. We™ll present that list next week.

The healthiest markets have many things in common. Most of them are great places to live, either close to the ocean, mountains, or major universities. Most of them didn™t have a huge run-up in prices during the boom and aren™t experiencing rampant deflation during the bust.

To compile these lists, we analyzed the top 75 housing markets in the country. We ranked them based on population trends and job growth, perennial drivers of housing demand. We also examined what™s happened with home prices; many of the healthiest markets have managed to hold the line on home values. And finally, we considered the rate building permits, which may be the single best ongoing indicator of builder confidence in a market. We combined all these metrics to produce a score for each market.

11. Nashville, Tenn.

2008 total building permits: 8,142

Nashville, the 20^th largest home building market, operated under the radar of the national housing boom. It didn™t ramp up wildly during the boom years, and it™s not contracting viciously during the bust. Median home prices remain an affordable $159,800, propped up by a growing job base.  Seventy percent of the residential construction is single-family. Some of the market™s resilience stems from above-average population growth of about 2.3 percent a year. Back in the day, 2005, Nashville accounted for 16,654 permits; it now runs at about half that level. But that™s a better performance than most major markets.

Top Builders in 2008:  

Let’s just throw the dead moose on the table – 2007 was a rough year for real estate.   Sumner County certainly didn’t  feel the same degree of  pain that was felt in other parts of the country, but we had our fair share.   While real estate is largely “local”, we felt the psychological effects of the national media preaching doom and gloom.   We also felt the mortgage crunch that certainly gave us a round of foreclosures, but more importantly, that made obtaining financing much more difficult even for many of those with good credit.   On the bright side, certain market segments remained rather robust, and homes that were priced right and staged right sold.   So what can we expect for 2008?   Well, probably more of the same; however, there is good reason to believe we will see the beginnings of a turn-around – both locally and nationally.

What went wrong?

Throughout 2007, inventory in Sumner (that is homes for sale) climbed to all-time highs.   While we typically hover around 1,300 homes on the market, we saw that increase by about 500 homes or 40%.   Ouch!   At the same time, many buyers took to the sidelines (read decided to rent) to wait and see what was going to happen.   This was great if you owned rental properties – we saw a 5-10% increase in rents.   However, sellers watched Days on Market climb by about a month, Expireds more than double, and average Sales Price to List Price ratios slide to about 96%.  

The hardest hit locally were builders and the luxury home market.   To make matters worse,  these two segments were frequently in competition with each other, as well.   The mortgage crunch put a screeching halt on jumbo loans.   This also aggravated  the problem  because even buyers with excellent credit couldn’t finance more than $410,000.   Inventory in Fairvue Plantation,  as just one example, skyrocketed.   Builders, many of whom started within just the last several years in the best of times, continued to do what they do – build.    Several of them seemingly ignored the absorption rates and built in the most saturated price ranges between $300,000 and $1 million+.   That combined with a frenzy to buy up lots and land left many builders strapped with inventory and interest payments  they have to carry through these lean times.   The question is can they hold out or will they face foreclosure or be forced to sell at greatly reduced prices.   We’ve already seen a few builders head into bankruptcy and others have recently begun to drop prices significantly in the luxury market.

We also saw a drop in  first-time home buyers as they  faced more stringent guidelines and had to bring more money to the closing table.   Investors took a wait-and-see attitude as well which further stalled sales.   Rehab loans have all but disappeared except for hard-money loans.   And we saw adjustable rate mortgages reset strapping some homeowners with significantly higher payments, and leaving them stuck trying to refinance under much more stringent guidelines.   Luckily, we didn’t have nearly as many buyers jump into “questionable” loans locally as we saw in other parts of the state and country.

So what’s the good news?

Throughout the “tough times” in 2007, certain markets remained fairly robust.   Homes in the low to mid $200′s in Hendersonville faired very well as just one example.   New construction in Saundersville Station and Creekside sold quickly.   In general, staging became more important, but homes that were priced right and in good condition sold.   Sellers and agents alike began to understand that homes had to be priced in one of two ways: more for the same or the same for less.  

Though November and December seemed to slow somewhat, January brought renewed buyer interest, and agents and builders enjoyed increased traffic.   We also saw inventory begin to drop slightly throughout the winter months; though it remains to be seen if this is a true correction or just the typical market cycle.   In any case, builders did finally seem to take note and reduce construction of “spec” homes.

The mortgage industry was hit hard and many lenders folded, but it appears as though things are beginning to stabilize in this industry as well.   With Bank of America in the process of acquiring Countrywide Home Loans, I would expect to see that trend continue throughout 2008 with additional M&A activity.   I think it is also probable that the Fed will reduce rates a few more times this year, given the general slow down in the economy nationally…which is likely to continue through the elections.   In turn, we should see mortgage rates remain very attractive.   I would also expect to see Congress pass some key legislation related to the mortgage and housing industries, raising limits and offering additional incentives to investors and  consumers.

Locally, the economy remains fairly robust.   We continue to see businesses and individuals moving to the area.   We have a diverse job market and a very reasonable cost of living.   We saw above normal appreciation rates over the last several years, but not to the extreme that other markets experienced.   Our homes are still very affordable and perhaps even undervalued.   I would expect to see prices in general to remain stable for the next 6-9 months, with some additional concessions in the higher priced homes.   I would also expect to see renewed energy both from traditional buyers and investors this year, which should help to bring our supply back to normal levels.   Assuming the national economy can avoid any major recession, the fundamentals would tend to indicate we could expect to see the local housing market return to some normalcy toward the fourth quarter.   While 2008 may not be anything to write home about, it looks like we should see an end to the “pain” and can look forward to a return to growth into 2009 and 2010.

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