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Stimulus and the Albuquerque New Home Market

It’s rare that I post someone’s article here in full. Actually, I don’t think it has ever happened before now. But, today that is precisely what I’m going to do. This weekend I received an e-newsletter from David Murphy, Publisher of SALESTRAQ™ of New Mexico, regarding the impact of the stimulus of package on the local home market. I found it very enlightening and asked his permission to reprint it in its entirety here. If you send David an email, I’m sure he’ll send you a copy of SalesTraq of New Mexico’s current May 2009 “Fast Facts” spreadsheet.

An element of common wisdom shared among parents for many generations is that they shouldn’t allow their children to eat too much candy. If their children eat too much candy, they’ll get a tummy ache, and eventually, vomit. In like manner, as adults we should intuitively know that we shouldn’t indulge ourselves with too much personal debt, including the mortgage variety. Of course, it will feel good at first to have our hands on whatever it is the debt has acquired for us. But in the end the debt will give us adults a different form of tummy ache, known as an ulcer. The Federal Government of the United States of America on the whole, however, hasn’t seemed to grasp this simple concept of “too much debt is bad”. Perhaps the growing economic bellyache our Country is experiencing is a necessary evil – a lesson we need to learn that too much debt may be sweet at first, but becomes sour later on.

We’ll get to some housing data shortly, but think about this with me for a moment; any city / municipal or state governments that have debt obligations exceeding their projected income must choose between two courses of action (or utilize a combination of the two). The first course is to cut expenses. This may mean downsizing programs or even eliminating some of them. They might require lay offs of local government workers. The second course of action is to increase the revenue stream via higher taxes, either on public services or privately generated incomes. (Recent American “tea parties” bear witness to the lack of popularity that the second option affords). How is it, then, that in recent memory the Federal Government of the United States generally promises to take neither route and still manages to substantially grow itself? How can it promise to increase public services and public sector employment, while simultaneously decreasing taxes? What magic does the U.S. Federal Government possess that makes this paradox possible, and can such magic charm us indefinitely?

To ascertain the answer, let’s first consider that the U.S. Federal Government acquires its spending power through three primary channels. 1) Selling U.S. debt to foreign countries. 2) Taxes; on goods, services, and personal and corporate incomes. 3) Inflation / Currency Devaluation. “Huh?” . . . what’s that? That, is the magic which the Federal Government possesses which lesser forms of government do not – the ability to print U.S. dollars out of thin air. Let’s just call it by a sweeter, candy-like name . . . “Stimulus”.

What may come to mind when we see that word “Stimulus” is the so-called “Stimulus Package”, or ARRA (American Recovery and Re-Investment Act) that recently passed the U.S. House and Senate and was signed into law by President Obama. In truth, Government “stimulus” also includes all the prior and subsequent bailouts for various banks and businesses, home foreclosure moratoriums, as well as millions of “stimulus checks” sent to the Americans deemed most likely to go out and blow them right away on candy, flat-screen TV’s and a plethora of other consumables. (God forbid anyone should actually save it or pay bills with it – that would be counter productive to the Government’s efforts). Even write offs of mortgage interest on your personal income tax is a form of Stimulus. In sum, it’s ALL “Stimulus”. Remember the financial “bazooka ” that then U.S. Treasury Secretary Hank Paulson boasted could be used to salvage Fannie Mae and Freddie Mac back in July of 2008? He was simply referring to yet another form of “Stimulus”. (Of note, that bazooka theory didn’t work out so well.)

But I digress.

How does the Government Stimulus impact the local housing market? In the most tangible way, there is currently an $8,000 first-time home buyer tax credit being offered (to anyone able to qualify for a loan that is). In typical fashion, the government defines “first-time” home buyers as anyone who hasn’t owned a home in the 3 years prior to purchasing this “first” home. (This is similar to saying that an individual busted for DWI just over 3 years ago can be caught now and regarded as a “first-time” offender.) Consequently, the government is able to deliver on its promise to essentially “lower taxes” by luring someone to buy a home that they otherwise would not, or could not, in exchange for some Stimulus candy. In the process, the U.S. Government must accordingly “print the difference” which has been lost in tax revenue. Will such Stimulus measures for luring home buyers ultimately succeed to pull housing out of its depression anytime soon? The answer to that, I believe, is no. It’s not for lack of trying on the part of the Government, but it’s something deeper and more profound. The country is simply piling up debt, ad infinitum, to the point where paying it back will become impossible. “We the People” are waking up to this dreadful fact.

In turn, the U.S. homebuyer psyche is in uncharted territory, as the local housing market is inextricably linked to the national economy right now in a way never before experienced by human society. There’s something fundamentally different about this recession/depression than those which have preceded it, and that fundamental difference is our modern day access to macro-economic information and its powerful effect on us. When, during all of prior human history, have we had such instantaneous access to such vast swaths of information about the economy? Economic news has now even become a form of entertainment, bearing a stronger resemblance to an NFL football game than to the academic and boring information outlets of old. It’s become popular and hip to talk about the economy, housing statistics, and investing, with the media utilizing fast-paced background music and high-velocity camera motions on shows to try to convince us why we should hold on to Bear Stearns’ stock when it really should have been dropped like a hot potato. The local housing market breathes and exists largely on the choices of men and women whose minds are being shaped as never before by what they daily see, read and hear about the broader U.S. economy. There is so much information out there today, and trying to digest it all can make one feel overwhelmed.

I hope that my assessment of the local housing market is more refreshing that that. My hope is that my evaluations are honest, fair and accurate. I am certain that I don’t always get the details perfect, but I hope that you can look with me at the local housing data with one eye, while keeping your other eye on the “big picture” which invariably drives the local housing market. Moreover, remember that numbers can be interpreted in a variety of ways. Let’s look at some important local data, and I’ll give you my interpretation of it.

I want to begin by taking a fresh look at where local New Home Base Prices are at, especially for the “entry level” buyer right now. Several months ago we looked at the increasing trend of smaller, less expensive floor plan options entering the local new home market. It’s time to look at that once again with updated information. The following data
shows the number of local new home floor plans in the greater Albuquerque metropolitan area that have been available to be built for less than $150,000 – going back over the course of several years:

Quantity of local new home floor plans available to be built under $150K in the greater Albuquerque metropolitan area. (includes Single Family Homes, Condos, Town Homes and Apartment Conversions):

May 2003 = 570 plans
May 2004 = 437 plans
May 2005 = 227 plans
May 2006 = 46 plans
May 2007 = 49 plans
May 2008 = 37 plans
May 2009 = 65 plans

Only 5 years ago back in May of 2004 there were 437 different options for buyers to get in a new home for under $150,000 in the greater Albuquerque metropolitan area. Today, there are only 65. That’s an 85% decrease over the last 5 years. Having said that, there has been a 76% increase compared to just last year. Notice how the terms “85% decrease” and “76% increase” sound close to each other numerically. It seems like it might be close to a “wash” in terms of percentage, right? The reality behind the actual numbers, however, can become lost in the translation. Going from 437 to 65 is a huge decline that shows how out-of-whack local new housing has been over the last several years. What we are seeing, then, is a sharp correction of the supply side heading in the right direction of demand. This is a “good sign”, in one sense. It’s “good” because we need more affordable new housing, and it’s beginning to show up more in the market. In another sense, this is a “bad sign”. It is “bad” in the sense that these smaller, less expensive homes will generate less revenue. In other words, the sales agent makes less money on the smaller house because the price is obviously lower. The subcontractors who built the smaller home make less for the same reason. The local and state government makes less in tax revenue on the smaller home for the same reason. The primary beneficiary is then the homebuyer, who (assuming s/he keeps their job), has a smaller monthly mortgage payment to deal with. No matter how you slice it though, the majority of people with ties to the home end up making less money, which means less disposable income, which means local businesses begin to suffer, which means layoffs for some, which all feeds back into the recession cycle.

As the housing bubble deflates in real terms due to a change in home buyer demand for smaller, less expensive new housing, it also continues to deflate in subsidiary terms as previously built, price-inflated bubble era homes are foreclosed on, walked away from, or in some cases pillaged like a vulture cleaning the carcass of a dead animal. All of these realities combine to spell less tax revenue for governments of all shapes and sizes, and sends any true “bottom” of the housing market further off into the hazy future.

This “big picture” of what’s happening to the housing market and its effects on Government is difficult to analyze. It’s very similar to watching the formation of storm clouds. You just look up one moment and say to yourself, “Whoa! Look at those storm clouds! It was clear just an hour ago!” If you have ever seen a time-lapse film of gathering storm clouds, it becomes much more apparent how the storm actually formed. In general observation, the process is very slow, almost totally imperceptible. But if you speed up the film, the mind grasps how it all came together and happened in the first place. The same is true when looking at the U.S. economy and its ties to housing. In hind sight it’s easy to see what went wrong, but during the moment it was happening it was almost impossible to notice, even for our illustrious politicians.

But I’ve digressed, again.

Let’s focus briefly on the other end of the housing spectrum; the local luxury resale market. When home prices were inflating during the early and mid part of this decade, many luxury custom homes were built. I want to look specifically at homes which today are listed on the local MLS at or above $1,000,000. A search earlier today showed there were 150 properties on the local market that fall into this price category. So, how many sales in this price range happened during the first quarter of this year? The answer is, 1. There was only one resale home sold for over $1,000,000 during the 1st quarter of 2009. If even 3 such properties could sell during each coming quarter from here on out, and not a single new listing entered the market for over $1,000,000, then it would still take over 12 years to absorb the current supply. Ouch! In terms of housing bottoms, the luxury market has the farthest to go without question.

So, what’s yet to come?

In my opinion, we are near a bottom in housing in some ways, but that bottom will likely be with us for quite a few years. The recession/depression we’re in will likely appear to wane in coming quarters, partially through the effects of “Stimulus” and Government redefinitions of economic indicators, but in reality I believe that price inflation is right around the corner and will have significant negative effects. I say that because anything of real value has at its core, scarcity. If something is rare, its value is naturally higher. When the U.S. Government prints up hundreds of billions more U.S. dollars via “Stimulus”, it is by definition devaluing the currency. The rarity of U.S. dollars, and thus the value of U.S. dollars, is eroded away when trillions more come rapidly into existence. Combined with dwindling inventories due to lack of credit availability, rising prices are inevitable. The benefits of inflation are reaped by those who receive the newly created money up front. Expect to see over the next two years some companies (with government contracts of course) do exceedingly well, including producers of solar cells, wind turbines, and other renewable energy manufacturing companies. Expect also to see over the next two years, further suffering in the private sector, especially in chain retail stores, the auto sector, and yes, new housing. Going forward it will be a mixed bag to say the least.

The famous investor Warren Buffet placed his bets on See’s candy back in 1972. His investment strategy has had a great return so far, because he knew that even in economic downturns, candy sales would remain intact. That’s because candy is relatively cheap, it’s legal, and it’s a strong vice for those who might be feeling down and need a quick pick-me-up. Just remember, too much of it isn’t good, but you probably won’t hear that from Mr. Buffet. In like manner, too much debt isn’t good . . . but you probably won’t see or hear that from Uncle Sam either.

New Communities for May 2009:

(No new communities opened in the last 30 days)
Closed Out* Communities this month: (Floor Plans still available in the SalesTraq floor plan archive file)

(No new communities closed out in the last 30 days)

*Builder either no longer has lots available, or development has ceased for the time being
More New Subdivisions and Developments COMING SOON:
CASA VERDE VILLAGE by Jenco Custom Homes (Far Northeast Albuquerque)
MESA DEL SOL Master Planned Community (Southeast Mesa)
VENTANA DEL BOSQUE by Aspire Homes (Downtown Albuquerque area)
VILLA LOMA TOWNHOMES by Points West Homes (Northeast Heights)