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Recovery Keys for Housing

Entry-level homes are the base of the housing market. From there households move up, creating the demand for more desirable and more expensive existing homes. Historically, much of the housing supply for first-time buyers has come from new home construction. Over the past decade a hot economy and easy qualifying has shifted the new home market to upscale housing.

Affordability
The key to the entry-level home has always been affordability. Now the new buzz word is New Affordability. This is the emerging market that promises to reenergize the housing market.

The Emerging Market
These newbies, as they are called, are coming from the ranks of renters, new immigrants and newly formed households. Their demands, lifestyles and financial needs are different than prior markets.

For the housing market to rebound three things must happen:

Supply must meet demand
The glut must go - The present inventory of unsold new homes must be absorbed. Single family housing starts are now running at less than 500,000 a year. The normal demand, based on the emerging market, is around one million units a year. As the first time homebuyers market heats up the National Association of Homebuilders anticipates sales to rise to about $700,000 by the end of '09. This means that demand will soon exceed supply by as much as 250,000 a year. This will create downward pressure on comparable existing houses that are listed at a higher price.

New product and price must meet new demand
There is a growing demand for housing, but for a product smaller then the McMansions built over the past decade. There has been a dramatic shift in demand and the home building industry is responding. They are; 1) discounting existing inventory through incentives and includes and, 2) building a smaller and less expensive product.

For example; Victorville, CA - In 2006, KB Homes was building 3,800 square foot homes selling for $328.000. Today they offer a stripped down 1,700 square foot model for $220,000.

Interest rates must remain low
Here is the wildcard the Fed is holding. Right now buyers are have a 6% FHA food fest. If rates stay flat, housing will win. If inflation starts to rock the economy and the Fed is forced to raise rates, all bets are off.

For the first time in 10 years we are again reaching a first-time buyer's equilibrium, where the payments on a new home nearly equal the cost of renting.

Posted by Joseph & Cheryl Melendez on 07/07/2008 11:42 AM

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