National housing market update: Though 2007 will continue to be challenging for the housing market–particularly for manufacturers and suppliers–declining inventory, a steady economy, and relatively low mortgage rates should keep the end in sight.

As we look back on 2006, it's apparent the second half of the year was the most challenging period the building industry has faced since the early 1990s. New-home sales slid significantly in most areas, and builders pulled back on supply by dramatically slowing plans for additional construction activity. As a result, inventory levels have come off peak levels in most markets across the country. While different markets peaked at different times, nearly all markets now have inventory levels that are holding steady or in decline. The cessation of inventory growth is a positive sign that the market is beginning to move back toward equilibrium.


Home builders will have a significant backlog of inventory to move even if demand conditions do improve during the spring home buying season, and while they will see some relief for their pain once home sales pick up, it's not likely to affect their suppliers until a significant portion of the excess inventory on the market has been sold. As a result, 2007 could be the challenging year for manufacturers and suppliers that 2006 represented for home builders.

Not all the news is dire. With a moderately growing economy and relatively low mortgage rates, the housing market has a reasonable foundation to mount the beginnings of a recovery this year. Additionally, the normal drop in base prices that one would expect to accompany such a market correction has not been as severe as some had predicted, mitigated in part by aggressive use of incentives by home builders. While incentives may seem equivalent to price drops, they provide builders with the opportunity to keep prices more stable over the longer term. In addition, incentives often come out of the pockets of companies affiliated with the builder, which means the cost of providing the incentive can be lower for the builder than the perceived value of the incentive for the buyer.

Keeping an eye on inventory levels and other key statistics will be vital in determining which markets are recovering first and fastest as the year progresses. Not all markets will recover at the same pace, and determining which areas are ideal for committing resources to in 2007 will mean the difference between a year of opportune growth and one of struggle or stagnation for builders, manufacturers, and suppliers alike.

–Jonathan Dienhart heads the Published Research Group for Hanley Wood Market Intelligence, a division of ProSales' parent company, Hanley Wood, LLC.

Market Spotlight: Washington, D.C.

The nation's capital and the surrounding metro area have a broadly diverse economy, with a highly skilled workforce and steady population growth. Rich cultural and historical sites make D.C. a popular tourist destination, and the strong growth in the IT and biotechnology industries is luring new highly educated residents from across the country to join the stock of job-secure government employees already firmly entrenched. The metro area's housing market has performed well in recent years, seeing solid jumps in median home prices in 2004 and 2005, albeit not at the outrageous pace of some coastal markets in Florida and California. The more moderate price gains have the beneficial effect of making the housing market correction not as severe in the D.C. area as it has been in other markets.

That said, while the long-term outlook for the city is very positive, there are several significant challenges it will have to overcome in the short term. Increasing restrictions on development due to land shortages for private use and government regulations are posing challenges for the home building industry in the area, resulting in a steady decline in permit activity that began in 2005 and accelerated in 2006 as a result of challenging market conditions. During 2006, the Washington-Arlington-Alexandria Metropolitan Division issued more than 23,000 permits, according to the Census Bureau, ranking it 13th in the nation. The broader Metropolitan Statistical Area (MSA), which includes the Bethesda-Frederick-Gaithersburg Metropolitan Division, issued more than 27,700 residential permits, ranking it 10th in the nation. For both geographies this represented a drop in excess of 20% from 2005, and current levels of permit issuance are likely to stay flat for the time being. Attached housing has been slowly gaining share of new homes sold in the area, a trend that is likely to continue as development restrictions and affordability push developers toward higher-density housing.

Housing affordability is a significant issue for D.C.-area residents, with a steadily shrinking percentage of the population able to afford a new or existing home. As of the fourth quarter of 2006, only about 30% of the population could afford to purchase a median-priced existing home assuming normal conforming loan terms. For new construction, that percentage drops to a mere 15%. As a result, it is becoming increasingly difficult to purchase a home, especially for first-time buyers. The pressure of the situation is only likely to increase with an expected influx of new workers to the region. The realignment of Fort Meade is expected to bring an estimated 45,000 new jobs to Maryland. While many of those new residents will primarily affect Baltimore, the eastern portion of the wider D.C. area also will see a healthy boost in population.

More jobs and new residents generally represent a positive impact, but they also can be a detriment. Improvements to and expansion of the transportation infrastructure of the D.C. metro area have lagged behind the population growth, and traffic congestion is an increasing problem. With more than 58,000 new residents expected to flock to the MSA in 2007, the transportation network will be further strained.

While Washington has its share of challenges ahead, the long-term future for the area is bright. The diverse and well-educated workforce, strong job growth, and reasonably high quality of life will ensure it remains a vibrant and distinctive city and housing market for decades to come.

–Jonathan Dienhart