New vs. Existing Housing

"How's the Housing Market?" -- Vol. 27

"Where" (location) is certainly one of the key qualifiers for anyone seeking to divine the health and direction of the housing market.

But so is "what?" -- as in "what kind of housing?"

In the housing market, the key distinction is between existing and new housing.

Conflicting Signals

That distinction explains how, literally in the same paper (the Star Tribune, on July 30), the front page ran a story saying that new housing inventory was shrinking, and that new permit applications were up.

Conclusion: things are getting better.

Meanwhile, the lead article in the business section attested to the slow-down in sales of existing housing, and an uptick in foreclosures.

The takeaway?

Things are getting worse.

Relative Size

Certainly by size, what happens to existing housing matters much, more more: existing homes account for more than 90% of the market, or about 5 million units annually, vs. less than 500,000 units for new construction.

However, economically, new construction exerts an influence far greater than its 10% market share would suggest.

That's because each new home represents tens (if not hundreds of thousands) spent on labor, material, land, appliances, furniture, etc. -- expenditures that reverberate through the economy many times over due to what's called the multiplier effect.

Overlapping Demand

It's also true that new homes frequently compete with existing ones for Buyers, just as used (pre-owned) cars compete with new ones.

So, the supply (and therefore) price of new homes affects the supply (and price) of existing homes -- and vice versa.

However, at least in the Twin Cities, my experience is that the two markets -- existing and new -- overlap less than elsewhere.

I see two reasons for that: 1) the vast majority of new housing locally is put up in the outer suburbs ("exurbs"), where land is cheapest; and 2) the price difference between a new home in the 'burbs, vs. an existing one closer in, isn't as extreme in the Twin Cities as it is elsewhere -- for example, the Bay Area.

Going back to "location, location, location," most Buyers first settle on "where," before they get to "what" (kind of housing).

P.S.: is Jim Buchta back? The long-time real estate reporter for the Star Tribune -- switched to the travel section 2(?) years ago -- has has several housing article bylines in the last few weeks.

If true, that's very good news!

Marooned in the Exurbs

Exurbs: 'Tomorrow's Low-Income Housing?'

As the housing bust and recession has turned the exurbs from engines of growth to economic laggards, many [families who bought recently] have the worst of both worlds. They are still on the fringes but have no equity. In many cases the amenities they hoped would follow -- new shopping centers, movie theatres -- have ceased construction or opened with only a few stores. Government projects like new schools and parks have also been delayed as budgets get cut and population growth has slowed.

--Conor Dougherty, "In the Exurbs, the American Dream Is Up for Rent"; The Wall Street Journal (3/31/09)

If high gas prices put the brakes on far-flung suburban developments -- dubbed "exurb's" -- wouldn't dropping prices logically revive them?

Well, no.

Even though gas is much cheaper, no one knows for how long. Like Hummers, homes that are long commutes from city centers are still very much out of favor (the WSJ article quoted above focused on metro Chicago).

Another problem is that the recession has laid low all the ancillary development that was supposed to arrive after the housing was in place. Now, private developers, government, and even billion-dollar companies such as Target are scaling back infrastructure and expansion plans. So, the promised amenities never arrived.

The combination of these factors has socked exurban property values, driving a disproportionate number of Buyers into foreclosure. In many cases, the foreclosed homeowners simply become renters nearby.

Mix together half-built subdivisions, long commutes, lots of foreclosures, a high percentage of rental properties, few (or non-existent) services . . . and the picture is not especially bright.

According to the Journal, that's why "some observers believe the growth of rental property is the first in a series of steps that will transform today's exurbs into tomorrow's low-income housing."