The Sullivan Group Market Observer
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First in a Two-Part Series
Between 2000 and 2005, an unprecedented housing market "boom" occurred in the United States. Annual residential construction levels increased 35%, single-family new home sales levels increased 46%, and home prices increased 58%. While strong periods of growth for residential construction and sales are not uncommon, most "booms" have occurred in years immediately following economic recessions when housing activity had been more subdued. Residential construction and sales activity did not contract during the 2001 recession as it had during previous recessions resulting in a record period of expansion. Housing market conditions in the United States took another unprecedented step in 2006 as residential construction levels declined 15% and single-family new home sales fell 17%. This was unusual in that similar declines that have occurred over the past 44 years in the United States all accompanied major national economic recessions with none occurring during periods of economic expansion.
With housing being a local enterprise, states and metropolitan areas around the nation had different experiences between 2000 and 2005 and are now transitioning away from peak market conditions on different tracks. Over the past six years, our consulting engagements have allowed us to be on the "frontlines" of several booming (now transitioning) markets in Arizona, Nevada, California, and Florida. From our consulting office in Dallas, we also had the opportunity to work throughout a state that was somewhat removed from the fast paced conditions in other locations. With many of the high-flying "boom" market locations now facing the most significant downward pressure in terms of construction, sales, and pricing, it is reasonable to question if Texas might be insulated from the current downturn considering the Lone Star state did not partake in the price appreciation spoils of the recent "boom" market. While early indications show that many areas in Texas are holding up well, we believe some storm clouds may still be on the horizon.
Boom! Boom! Boom!
The housing market "boom" that occurred between 2000 and 2005 was widespread with residential construction activity growth increasing at a pace that exceeded the national average of 35% in 28 states of the 50 states:
While Texas experienced an above average increase in residential construction activity (third largest increase), the increase in activity was not accompanied by an above average increase in housing prices:
At the national level, housing prices skyrocketed 58% between 2000 and 2005 (average of 11.5% per year). Several states that experienced the strongest growth in terms of residential construction activity also achieved the highest price appreciation (California, Nevada, Florida, and Arizona). At an average of just 4.7% per year, housing price appreciation in Texas between 2000 and 2005 was well below average (ranking 16th out of the 20 most active homebuilding states).
Letting Some Air Out of the Tires
The winds of change emerged in 2006 as housing market conditions transitioned away from the peak levels reached in 2005. At the national level residential construction activity declined 15%, single-family new home sales fell 17%, and home prices increased less than 2%. Many of the states that led the upswing from 2000 to 2005 emerged as the downward leaders in 2006 (states such as Florida, Arizona, California, and Nevada):
Price appreciation levels that typically exceeded 15% per year have dropped back to low single-digit levels in many previously "booming" states. States such as Texas that did not experience significantly above average price appreciation from 2000 to 2005 have not shown a contraction in sales activity or lower price appreciation levels during 2006.
Volume 9
While early indications show that many areas in Texas are holding up well, we believe some storm clouds may still be on the horizon.
- Tim Sullivan
