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From Online Newsletter July 2009

National Building News - June 22, 2009

Housing markets in California that have been among the worst hit by the current downturn appear poised for recovery, according to speakers at PCBC in California on June 17-19, but the marketplace that emerges there and in other parts of the country in the coming months and years will be far different than what preceded it, they said.

Builders were advised to prepare themselves to do business with prospective home buyers who are looking for a place to live rather than a quick financial investment, and they were told they will have to balance consumers' diminished, more realistic expectations with their ongoing desire to find a new home that is nevertheless innovative and exciting.

The period of transition to a healthier climate for home building won't necessarily be easy, analysts cautioned, with major uncertainties over mortgage interest rates, unemployment levels and the success of the Obama Administration's economic stimulus efforts still clouding the horizon as the nation struggles to wrest itself from the most damaging recession in decades.

"Every builder I know has laid off most of their staff, and contractors and suppliers we've done business with for years have folded up shop," said Horace Hogan II, chairman of the California Building Industry Association, in a June 17 news conference. "I can assure you this is the worst housing recession we've ever experienced."

Based on the number of housing permits pulled during the first four months of this year, he said, the Construction Industry Research Board is projecting that the state will start construction on only about 40,000 homes this year, down from 65,000 permits in 2008, which was a record low.

By comparison, four years ago 212,000 permits were pulled in California, where an estimated 240,000 new units are needed each year to keep pace with population growth.

"But we're not giving up hope," said Hogan, who cited indications of a recent turnaround in single-family starts. "And Mark Zandi, chief economist for Moody's, told us yesterday that he thought we were hitting bottom and that it's time for builders and developers to get back in the game."

An increase in consumer confidence and signs that the national economy is beginning to stabilize provide a basis for optimism among home builders, he said. "But there's no doubt in my mind that the biggest reason we're seeing improvements in California is the combination of state and federal tax credits. As predicted, these incentives are getting people off the fence and back into the market."

In addition to the $8,000 tax credit available from Uncle Sam to first-time home buyers who close before Dec. 1, California has benefitted from a state credit available for new-home purchases. Hogan said the state stimulus had an immediate impact on traffic and sales when it took effect in March and he credited it with helping many builders quickly sell off their standing inventories.

With virtually all of the $100 million allocated for the tax credits likely to be claimed by the end of this month, Hogan said that builders are pressing state lawmakers to allocate another $200 million in funding for the program to keep it up and running through next March.

Continuing the credit, he said, would add to the state and local taxes generated by new construction and help create more badly needed jobs.

Looking on the Bright Side

Pollster J. Walker Smith, president of Yankelovich Partners, Inc., told PCBC attendees that they are going to have to learn how to make the most of the current economy by responding to the "liquidity trap" that has been a shock to demand and has gotten consumers "rethinking value in a fundamental way."

"There is a lot of change in the marketplace," Yankelovich said, "but opportunities haven't disappeared." He pointed to such companies as Hyundai, Jet Blue, Jos. A. Banks and Bigelow Homes, all of which have offered their buyers financial incentives to help mitigate the risks resulting from losing a job.

"Consumers now have a different framework within which they will make decisions, driven by responsibility," he said. "Your approach to the marketplace has to reflect this."

However, even in a smaller economy providing smaller growth, builders' prospective customers are not going to be driven by frugality and they are not heading back to the basics, he said. "They will be just as aspirational as ever, with a different budget," and they will be more averse to risk and have a smaller appetite for debt.

"You have to innovate, or you will die," he said. "Consumers want something new."

Yankelovich cited recent polling showing that 61% of Americans believe they are headed for a brighter future, about 15 percentage points higher than in 1979. "Optimism is something that sells nowadays," he said, and builders should be offering their customers something that looks on the bright side and allows them to reinvent themselves.

Eighty-seven percent of the public believes that it's too easy today to avoid taking responsibility for personal decisions, he said, and 41% say that not buying a home that is larger than what you need is being a good citizen.

Builders should also focus on relating to the local community, according to Yankelovich, a trend that is very much on the rise. "We're settling in and don't want to move anymore," he said, noting that less than 12% of U.S. households changed residences in 2007-2008.

To read the latest issue, please visit Nation's Building News Web Site