Foreclosures not a major factor in slow home starts

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There’s no clear-cut way to determine how the rising number of foreclosures is contributing to the decrease in new homes being built. In 2006, Wisconsinites pulled 8,005 fewer home-building permits than they did in 2005.

The short answer is that rising foreclosures didn’t help the situation any. But the 34 percent increase in foreclosures between 2005 and 2006 is a symptom of larger market forces at work. More foreclosures may exacerbate some of the things that are already causing sales to decline, but in the end they’re just another moving part in a housing market that’s mellowing out after several years of boom.

“This was sort of a late development to hit the market; this sort of came up in March or April of this year,” said Elliot Eisenberg, housing policy economist for the National Association of Home Builders. “You can have a long list of things that are possibly explaining what’s going on.”

One reason could be that most everybody who was interested in buying a new house did it in the boom years between 2000 and 2005 when interest and mortgage rates were at historic lows, Eisenberg said.

“The boom was so big that it’s painful to come down,” he said.

There are numerous reasons new home starts were down in 2006 and foreclosures is probably one of the smaller ones, said Matt Moroney, executive director of the Metropolitan Builders Association. In terms of hard economics, more foreclosures mean there will be more existing homes for sale on a market that already had an increasing number of available houses.

“The foreclosure incidence isn’t having a significant impact, but it doesn’t help to have additional inventory come into the market because of foreclosures,” he said.

The most significant impact of foreclosures may be more mental than monetary. The increasingly common news reports of skyrocketing foreclosure rates are giving potential home-buyers the willies. People who already own houses are deferring plans to build a new one because they’re concerned they won’t be able to sell their existing home, Moroney said.

“I think it’s more the stories causing jitters,” he said, and then paraphrased a potential home-buyer. “‘I’d really like to build, but can I sell my home? We’re not going to sign a construction contract until I sell my home.’

“How we get people off the fence is something that’s being debated.”

Miracle Homes, an MBA member based in Richfield, recently started offering to buy its clients’ homes as part of the deal to build a new one, Moroney said.

Despite the downturns in new home construction, both Moroney and Eisenberg maintained a rosy outlook. Moroney said he’s getting fond of citing the statistic that there were only 13 months between 1971 and 2001 where interest rates were below 7 percent like they are now. Eisenberg noted that it’s a buyers market, and increasing inventories — due partially to foreclosures — paired with decreasing sales rates mean the prices of homes will slowly drop until consumers come back to the trough.

“There’s no question that builders’ earnings are taking a hit hard, but they’re still around and their books are still strong,” Eisenberg said. “I haven’t seen companies folding up their tents and running away.”