Housing Market Overview
THE ECONOMIC PICTURE IS BECOMING CLEARER
Over the last few weeks there has been a flurry of media attention devoted to several newly released statistics on the national economy and the national housing market. Updates to many of the datasets that track the economy are released on a quarterly basis. Having just moved past the end of the 2nd quarter, it should come as no surprise that much of this new information released is given a headline. But what conclusions can we draw from all of the information out there? Major news sources often have conflicting opinions. In fact, a recent article about contradictory information from the CNN website reads, “Conflicting economic data show either the beginning of an economic recovery or a worsening recession.” Which is it? Is it true that we cannot derive any meaningful conclusions from the jumble of statistics we see from day to day?
While economists cannot give us any specific long-term economic forecasts, it turns out that the data do show a consistent picture of an economy that is in the beginning stages of recovery. Those of us in the housing industry need to keep in mind three things in the coming months: (1) despite conflicting news reports, the evidence gives us a clear picture that the economy is leveling off; (2) a new market equilibrium is being established in which the number of housing units demanded will be approximately fifty percent less than during the peak of the housing boom; (3) every business in the housing industry has to adjust to these new market conditions to be successful.
If we look at the economy in its entirety over the past twelve months and especially since last fall, we will get an accurate picture of how much the economy has recessed. GDP- a measure of the output of all final goods and services – has fallen three percent since September 2008. National unemployment is currently at 9.5 percent, up 3.7 percent since June 2008 and at its highest level in 27 years. South Carolina has one of the highest unemployment levels in the nation at 11.6 percent. The construction industry is the 2nd highest in job losses in South Carolina at 8.8 percent, a testament to the reduction in housing sales, which are down 30 percent in South Carolina in the last twelve months (April 2008 – March 2009) compared with the previous twelve months. Coupled with a decline in national housing prices of 0.5 percent, this paints a bleak picture of our economy and our industry. Yet this is not the whole story.
If we focus on the data since the beginning of 2009, we actually get a very different representation. We can liken our current situation to being at the bottom of a slide. We have come down from the top, but our decline has come to an end. The data support that we have reached a point where the economy is no longer in decline. In other words, while the economy has yet to get significantly better, it is no longer getting significantly worse.
We can observe this directly. Consumer confidence, which had fallen consistently from July 2007 to December 2008, is now trending upwards and has increased by 16 percent since January 2009. This has led to an increase in consumer spending of 1.3 percent over the same time period. The turnaround of consumer confidence has, in previous recessions, often been one of the key indicators of renewed economic growth.
Another indicator that the economy is leveling off is the decline in initial unemployment insurance claims, both nationally and here in South Carolina. After the surge of these claims in late 2008, national claims are down 22 percent since January 2009 and down 55 percent in South Carolina over the same time period. This is perhaps the single best indicator that our economic decline is coming to an end because it points to a decrease in the number of workers being laid off. The incidence of layoffs can only decrease once businesses quit contracting. Unemployment itself is still rising both nationally and in South Carolina, but this is not unexpected. Unemployment is a lagging indicator of the economy and usually does not begin to fall until we are well into an economic recovery.
So while the economy is down, the data support that we are at the bottom of the slide. Where does that leave us? First, we must recognize that a new market equilibrium is being established in which the number of housing units demanded will be approximately half of what they were at the peak of the housing boom. In South Carolina, for example, housing starts are at 51 percent of their 2008 levels (year to date). When economic growth returns it will be slow and steady, not a rocket boost to where we were two years ago. We must adjust to this new market – but how?
This new, smaller market brings two important things with it: (1) a different type of customer; (2) a different type of competition.
THE MARKET WE KNOW HAS CHANGED
As the economy has changed, so too has the environment for our marketing efforts. The new reality is that competition has increased. As the industry has struggled to dispose of excess inventory, price reductions have changed the nature of our competition. Homes that had been priced thousands of dollars higher have moved down the price scale, but because they were speculative construction, the features they contain are more typical of the higher priced product. In addition, consumers that have been sitting on the sidelines are now venturing forth seeking that “deal of a lifetime” they have heard about. What are we to do?
First, we have to recognize that we are not going to return to the sales levels of the past few years. We will have to confront the reality that contracts are going to be harder to come by because of the increased competition for a smaller number of total contracts. Your brand will become an increasingly important feature of a new home, and brand recognition will also increase in importance. Be consistent in what you do and help the consumer understand how you differentiate your home from the others being offered.
Remember that price is the great equalizer. When the market is over supplied, prices will fall. It is important to realize that the value placed upon your home is set by the perception of your potential buyer. Offer those items that give the greatest perceived value and create a list of options for the others. That way, customers can personalize their home, and its price tag.
Communicating with your customer is still important. Almost everyone now understands that the first place consumers shop is online. Ask yourself the following: “How do they find my site?” Unless you have a strong answer, you are probably losing sales. It is not difficult to improve your visibility, nor is it expensive. Just as we have used bandit signs to direct visitors to our communities, we need virtual bandit signs online to lead prospects to our web site.
Do not abandon tried and true media. While it is accurate to attribute diminished impact, the cost per unit of impact is the better way to allocate your media dollars. Do not be reluctant to ask for value added consideration; you might be surprised by the reaction.
Finally, do not ignore your sales force. The market has changed for them, too. It may be true that talent is more important now than ever before, but talent without training reduces the potential of your employees. As their situation has changed, they need more tools and better tools to cope with their new situation.
Information supplied by:
Michelle Dixon
Mortgage Consultant
Wells Fargo Home Mortgage
Michelle.Dixon@wellsfargo.com
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