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Economists: New home sales outlook up slightly

Economists said Thursday they are cautiously optimistic about the prospect of new home sales for the coming year, but that homebuilders must be careful to avoid a second bubble in the region.

Although there is still a surplus of existing homes for sale, the market will tighten up next year, and increased demand will spill over into new home sales, experts said at the Home Builders Association of Maryland’s 2011 Real Estate and Construction Forecast Conference.

R. Andrew Bauer, a regional economist for the Baltimore branch of the Federal Reserve Bank of Richmond, said that although he made similar predictions at last year’s event, he was more confident this time around.

“What’s going to happen next year is there will be a sustained increase in the residential markets,” Bauer said. “Home prices will have bottomed out [early in the year] and should see increases by the end of the year.”

Bauer said that sustained modest job growth, continued low interest rates and the fact that consumers on average have “settled their balance sheets” over the course of the recession and beginning of the recovery create better conditions for the housing market.

“[The Federal Reserve’s] Qualitative Easing Two plan will help keep interest rates low, both long-term interest rates and mortgage rates,” he said. “This should be beneficial to the housing market.”

But Bauer warned to only expect a modest increase in business, “nothing drastic.”

David Crowe, chief economist for the National Association of Home Builders, congratulated the audience of homebuilder companies for having made it through the worst of the recession. He painted a similar picture of modest recovery in 2011, explaining that unlike most recoveries, the homebuilding business is lagging other sectors instead of leading them.

“Usually housing is the engine behind recovery, but we’re a victim of the economy now, not a leader,” he said. “We need job growth first so people become comfortable enough to resume spending.”

But while Ken Wenhold, regional director for the Metrostudy, a consulting company that studies housing markets around the country, agreed that the inventory of existing homes will tighten over the next year, he warned that companies need to secure new lots, given the lack of available lots and the length of time needed to gain government approval for new development permits.

“In 2007, land acquisition departments disappeared, and very little was submitted to counties in the last three years,” he said. “Nothing was selling, and there were plenty of lots already, and the cycle time in Maryland is very long compared to other regions. So companies have been drawing down on vacant developed lot supplies [ever since].”

Wenhold warned that a new bubble could form around the now scarce vacant lots already zoned for development, as some national homebuilding companies are willing to spend large sums of money to buy up and develop lots in the area.

“If we see any type of uptick, 25 percent let’s say, these numbers will drop really quickly, and there’s nothing in the [pipeline] to replenish these numbers,” he said. “Maryland is the second tightest lot market [in the country], and it is unique as being constrained politically and by regulations. If a builder doesn’t have any more lots, it can’t build houses and has to go out of business.”

Anirban Basu, CEO of the Sage Policy Group, a Baltimore-based economic and policy consulting firm, said he fears the problem has not been consumer confidence, but actually a shift in consumer behavior. He pointed to the success of Black Friday and Cyber Monday sales as evidence of what he called “the new normal,” where people are more likely to move in with relatives or roommates rather than purchase new homes after entering the work force.

“People think, ‘If I don’t pay rent or a mortgage, I can afford to buy this,’” Basu said. “What you really have to ask yourself is, ‘Will the traditional relationships re-form?’”

Basu did say that the market could improve next year, for a number of factors, from the Base Realignment and Closure process  to a divided federal government producing fewer and more centrist policy changes.

“Tax credits could come back, because the government knows that the housing market needs support,” he said. “The problem is that it will cost the federal government money. I see there being modest improvements, but the formation of demand has been far slower than predicted.”