EconSouth (Fourth Quarter 2008)

The Southeastern Economy in 2009

Construction and Real Estate Languish as Economy Swoons
foreclosure graphic

The Southeast's residential housing market continued to suffer from weak demand during 2008. New home construction and sales deteriorated further while existing home sales levels stabilized in many parts of the region.

Inventories of homes available for sale shrank, but foreclosed homes owned by financial institutions became a larger share of the available inventory and depressed both new and existing home prices.

Florida and Georgia hit hardest
Florida homebuilders opened 2008 with a heightened motivation to offer substantial price incentives to move inventory. Existing homeowners also began to come to terms with price cuts, although grudgingly. As a result, home prices continued to slide, ending the first quarter nearly 16 percent lower than a year earlier.

Consumer Spending
Real Estate

But in the second quarter, single-family home sales declined more moderately, decreasing only 6.5 percent on a year-over-year basis, according to the Florida Association of Realtors. During that quarter, the wave of foreclosures that hit Florida homeowners in 2007 began to show up on financial institutions' books (referred to as real-estate owned, or REO, inventory). Greater discounts were offered on these properties, and in the second half of 2008 the pace of REO inventory accumulation accelerated across most of the state.

In the third quarter, sales of existing single-family homes across Florida rose 5.4 percent above weak year-earlier levels as home prices fell 20 percent. Contacts in some markets noted that REO sales accounted for as much as half of sales and contributed to the substantial decline in the median home price.

In Georgia housing markets, existing home sales also destabilized somewhat during 2008 while a glut of foreclosed properties, particularly in the Atlanta market, weakened home prices. According to the National Association of Realtors, existing home sales during the second quarter fell 21.4 percent statewide compared with a year earlier. During the same period, Georgia home prices declined 3.6 percent, according to the Federal Housing Finance Agency purchase-only house price index (see chart 1).

Many Atlanta homebuilders faced troubles during 2008. On the heels of weak price growth in 2007, they were forced to cut prices in 2008 to move inventory. Over the past decade, the Atlanta market led the nation in single-family building permits, reflecting the market's attractiveness to homebuilders. But since their peak in 2005, permits have declined nearly 75 percent through the third quarter of 2008. This dramatic slowdown pushed many homebuilders into bankruptcy or closure. In September, the Greater Atlanta Homebuilders Association reported that its membership had declined 22 percent in the past two years.

Related Links
On the Web:
U.S. Census Bureau's economic indicators
National Association of Realtors data on existing home sales
Florida Association of Realtors data on existing home sales
FHFA home price index
S&P/Case-Shiller Index

Other Southeastern states also feel the pressure
The remainder of the Southeast was not hit as hard as Florida and Georgia by the wave of foreclosures and the run-up in REO inventory. However, downward pressure on home prices and reduced access to financing were themes in these markets as well. Home sales continued to soften (see chart 2), but home price declines were more muted than in the Atlanta and Florida markets.

Alabama's year-over-year existing home sales growth continued to soften during the third quarter. The slide in existing home prices continued as well, with prices ending the third quarter at levels just below those a year earlier. Single-family building permits continued to weaken across the state, and builders reported that new sales declined significantly in the third quarter from year-earlier levels.

New Orleans and Baton Rouge existing home markets remained weak during 2008, experiencing disruptions from hurricane activity during the third quarter. Declines in single-family permit growth recovered somewhat (but remained negative year over year) during the first half of the year but then weakened further in the third quarter. South Louisiana homebuilders reported that third-quarter sales declined moderately compared with a year earlier. Several large condominium projects were put on hold during the second half of the year as financing dried up.

Home sales and construction in Mississippi remained below year-earlier levels during 2008 as activity continued to decelerate from the post–Hurricane Katrina surge. Homebuilders in south Mississippi reported that sales declined significantly in the third quarter compared with a year earlier.

Chart 1
Existing Home Prices
Chart of Existing Home Prices
Source: Federal Housing Finance Agency

In Tennessee, both the Nashville and Knoxville housing markets experienced a pickup in home sales during the third quarter after sales slid earlier in the year. But single-family permit growth in the third quarter remained below year-earlier levels while homebuilders reported that sales were flat or slightly down.

Commercial real estate weakens further
Like housing markets, the region's nonresidential real estate markets experienced shakier conditions during 2008. Early in the year, commercial contractors reported declining backlogs, particularly in Florida. Contractors also noted that the field of bidders on projects became more crowded as bidders chased fewer projects and as some residential contractors and subcontractors turned to nonresidential projects to take up the slack in their residential work. Subsequently, across the Southeast some projects came in well below expected cost at bid time.

In addition, retail projects were postponed or canceled because of softening consumer spending. By midyear, more nonresidential construction projects were put on hold across the Southeast as access to financing continued to shrink. Infrastructure rebuilding along the Gulf Coast remained a bright spot, but state and municipal spending was under pressure by year-end across much of the Southeast as budgets for road and highway projects shrank.

Demand for office and industrial space also weakened in the Southeast during 2008 (see chart 3). Lackluster retail sales led retailers to slow expansion plans and shutter underperforming stores. Businesses also began to shed jobs and curtail growth, resulting in rising vacancies across much of the Southeast.

Chart 2
Existing Home Sales
Chart of Existing Home Sales
Source: National Association of Realtors

Office and industrial vacancy rates in the region trended upward during 2008. According to real estate service firm CB Richard Ellis, office vacancy rates had already begun to rise in Florida in 2007, and that trend carried over into 2008. The most dramatic rise in office availability was in the West Palm Beach–Boca Raton and Jacksonville markets. Elsewhere in the region, the office vacancy rate rose modestly in Nashville despite several large corporate relocations to the area. In Atlanta, vacancy rates rose slightly from year-end 2007, and sublease availability grew during the third quarter.

Industrial vacancy rates were uneven across the Southeast, according to CB Richard Ellis, but weaker conditions were apparent in several areas. A surge in completions during the third quarter, coupled with weak economic activity, caused a jump in vacancies in Tampa. Similarly, in Jacksonville expansion at the port during 2008 brought a wave of completions that the market was not able to fully absorb. In Atlanta, the industrial vacancy rate declined somewhat from the year-end 2007 level, but during the third quarter of 2008 absorption turned negative for the first time in five years. Vacancy rates in south Florida and Nashville markets in 2008 were little changed from year-end 2007.

In New Orleans and Baton Rouge, commercial real estate markets were mostly steady during 2008, according to Latter & Blum Realtors. Office occupancy rates remained strong in both markets through the third quarter while industrial markets were mixed. Baton Rouge continued to benefit from port growth and petrochemical plant expansions while the New Orleans market experienced weaker demand.

In Mobile, Ala., construction of the ThyssenKrupp Steel facility continues to be a boon for industrial activity.

Chart 3
Metropolitan Office Vacancy Rates
Chart of Metropolitan Office Vacancy Rates
Source: CB Richard Ellis

Looking ahead to 2009
In the coming year, housing activity should remain weak. Home prices should continue to slide as home sales will likely exceed weak 2008 levels in many parts of the Southeast. Recovery in the region's housing markets will depend on the availability of credit for homebuyers and on the level of REO inventories, which will continue to push home prices down in the Southeast, particularly in Florida. How long that downward pressure persists depends on how fast those inventories are worked down and whether foreclosures stabilize or decline. The third-quarter boost in sales shows that buyers can be lured by deeply discounted homes. Buyers' access to credit is a current hurdle, so any easing on that front would benefit housing.

The commercial real estate market is also likely to weaken somewhat in 2009. Most notably, more retail store closures are expected, and rents will decline year-over-year in the Southeast, similar to national trends. Office vacancy rates will continue to rise modestly across the Southeast as employment levels decline and rents remain depressed. Demand will also slacken in industrial markets, particularly along the East Coast as import/export business is curtailed. Current backlog levels point to a further slowdown in commercial development.