2007 Worst Year for Local Builders in a Decade
Jim Buchta at the Star-Tribune reports that 2007 was the worst year for Twin Cities Home Builders in a decade: In 2007, home builders were issued 4,888 permits to build 8,961 units in the Twin Cities metropolitan area. That’s a 29 percent decline in new units over 2006 and a 53 percent decline since the market peak of 2003 Which begs the question, what’s in store for 2008? The perennial optimists at the Builders Association of the Twin Cities have this to say: BATC president Noonan, who is also vice president of the Minnesota division of Rottlund Homes, is optimistic that the market has turned a corner and that lower prices, builder incentives and an abundance of unsold homes will help drive buyers back into the market. We’d like to be able to agree that falling prices and slick incentives alone will right the real estate market, but it is not quite that simple. First, all of the conditions - supply overhang, lack of buyer/seller confidence, falling prices, and tightening credit standards - that led the builders down in 2007, still remain, and may get worse in 2008. Second, in normal markets, falling prices stimulate demand, but in the early stages of a falling real estate market (with a huge oversupply,) price declines can have the perverse impact of making things worse. In the same way that rapidly increasing prices stimulate demand, declining prices can reduce demand by reducing the number of people who can sell their home at a profit and buy a new one. Falling prices also erode the confidence of buyers, who fear buying into a market that may leave them updside down and unable to sell for the price they paid. The end game here is a darwinian test of survival of the fittest - the builders that can remain profitable while unloading their inventory backlogs at or below cost will survive to see things turnaround. Our prediction is that the builders in the Twin Cities will look back fondly on 2007 as a good year compared to 2008. Metro Home Builders: Worst Year in More Than a Decade [Strib]