EconSouth - Fourth Quarter 2007

Conditions in many residential housing markets across the Southeast continued to deteriorate during 2007 as sales figures and construction activity declined, home inventories rose, and home prices fell. Much of the downturn is concentrated in the Florida market, where weakness intensified. However, various Georgia housing markets experienced significant declines starting early in the year, and weakness appears to have spread to other areas of the Southeast during the second half of 2007.

Florida builders hit hard
Weakness in Florida housing markets was widespread during 2007 as inventories across the state rose to unprecedented levels. At the same time, industry contacts said that skyrocketing insurance rates and property taxes also deterred home buyers.

During the spring of 2007, home builders offered large incentives and, in some instances, cut prices to home buyers. For a time, those approaches appeared to help stop the slide. By fall, however, builders found that sales incentives were no longer translating into sales. Builders also reported that home buyers cancelled contracts in record numbers during 2007. In response to weak sales, homebuilders continued to curtail construction and lay off workers.

By the end of the third quarter of 2007, year-to-date single-family permits were down 52 percent in Florida compared with a year ago, and multifamily permits, dominated by condominium units, declined by more than 44 percent, according to the U.S. Census Bureau. However, while single-family construction came to a virtual standstill in many parts of the state and permitting of condominium projects dropped sharply, developers are finishing condominium projects that were already under way.

Existing home sales also stagnate
Sales of existing homes also declined across the state as many buyers continued to take a wait-and-see approach, hoping for even lower prices. Despite the encouragement of real estate agents, many sellers were reluctant to reduce their asking prices. But as the year unfolded, more and more individual sellers gave way on their asking price or simply took their homes off the market.

The Florida Realtors Association reported that during the third quarter existing home sales declined 29 percent compared with already low sales from a year ago, and condominium sales declined 27 percent. The single-family median sales price for existing homes in the state declined almost 7 percent in the third quarter compared with a year ago, and condominium prices declined almost 5 percent. Southeastern states posted negative growth in existing home sales into the third quarter of 2007 (see the chart), according to the National Association of Realtors.

Sagging housing not limited to Florida
The housing market downturn was not limited to Florida in 2007. Georgia housing contacts noted significant declines in new and existing home sales starting in early 2007. By late spring, weakness in other parts of the Southeast also began to surface. Contacts in Nashville and Knoxville, Tenn., reported year-over-year declines in total (new and existing) home sales in the third quarter. The glut in the Mobile, Ala., condominium market continued to be a drag on that state's housing market in 2007, and home sales in Birmingham and Huntsville dropped during the third quarter on a year-over-year basis. Even Mississippi and Louisiana housing markets experienced year-over-year declines, although this drop-off comes on the heels of a very strong 2006. However, contacts along the Gulf Coast note that insurance availability and higher costs hurt demand for homes.

Office and industrial real estate also softens
In contrast, nonresidential real estate markets in the Southeast have held up fairly well, but even those markets became soft in the second half of the year. Commercial contractors throughout the region reported that construction levels were flat to slightly up, but Florida contacts noted weakness in backlogs accumulating around midyear. By the third quarter, modest softening was evident in Georgia's commercial markets as well. Rebuilding along the Gulf Coast remained strong as the recovery from Hurricane Katrina continued, but—as in the housing market—insurance availability and costs remain a stumbling block to many development projects.

Regional office and industrial vacancy rates remained relatively stable during 2007. Office vacancy rates in Atlanta continued to be high despite solid absorption during the third quarter. In Miami, Nashville, and Jacksonville, however, vacancy rates remained relatively low. Vacancy rates in Tampa, Orlando, and Fort Lauderdale also remained low but were trending upward in the third quarter. Contacts indicated that weakness in Florida's housing market had translated into slackness in the office sector as service firms related to housing consolidated or closed.

Existing Home Sales in the Southeast, 2003–07 Source: National Association of Realtors

Industrial vacancy rates were uneven across the Southeast. During the third quarter, vacancy rates in southern Florida and Tampa industrial markets increased slightly compared with a year ago, but vacancies in the Orlando and Jacksonville markets fell by nearly 2 percentage points, according to CB Richard Ellis Group Inc.

Looking ahead to 2008
Weakness in the regional housing markets will persist in 2008, particularly in light of tighter lending standards and rising foreclosure rates. Florida inventory levels will remain high, particularly in the condominium market as buildings are completed next year and left largely vacant.

Across the Southeast, foreclosures will add to available inventory and hold down housing prices. An optimistic forecast would have declines in housing activity for the region as a whole continuing until the middle of 2008, with a subdued recovery coming afterward. However, weak housing demand may persist beyond the middle of 2008, especially if some borrowers lack access to affordable credit. The extent of the impact of foreclosures on housing prices and housing wealth is also uncertain.

Commercial development should remain strong along the Gulf Coast in 2008 but will slow from high levels as some of the initial hurricane-related rebuilding winds down. Commercial construction in the rest of the Southeast will likely feel some pressure from weak housing markets in the coming year, especially for developments such as retail space, which tends to be built near residential developments.