Jun 11 2008 12:34PM | Permalink | Email this | Comments (0) |
Blog This! using: Blogger.com | LiveJournal |

I feel like I keep talking about this, but declining prices are going to continue to be a huge influence on the remodeling market. While it's great that sales might be picking up, as long as prices keep going down, we won't see a recovery in remodeling.

A J.P. Morgan analyst said today that he expects prices to fall 25 to 30 percent from their 2006 peak to 2010. Based on the latest Case-Shiller index that would mean we're a little more than halfway to the bottom on a national basis. (The original wire article said he expected them to drop another 30 percent, so at least this is better!)

Simply put, it doesn't make a lot of sense to put large amounts of money into something that keeps going down in value. That means fewer big projects for the foreseeable future. Even after prices recover, it's going to take a while for many homeowners to be confident in the value of their homes.

Sacramento might be our first test case. Prices fell faster and earlier there, but now it looks like sales may finally have hit bottom. According to the local Realtors' association, sales in May were up 76 percent from a year ago. That's because prices were down 34 percent over the same period. Of the 1,654 homes sold in May, 65 percent were bank-owned (foreclosed) homes. Wow.

California was one of the areas where we saw the most ridiculous price run-ups, so the big decline is not a surprise. The question now is, is this a real recovery or just a temporary bounce from bargain hunters? It's especially interesting in light of this article from today's Wall Street Journal, which used Sacramento as an example of what lenders are calling the "buy and bail."

In markets hit hardest by falling home prices and rising foreclosures, lenders and brokers are discovering a new phenomenon: the "buy and bail," in which borrowers with good credit buy a new home -- often at a much lower price -- then bail out of the "upside down" mortgage on their first home.

It will be interesting, as well, to see what effect this has on the remodeling market. Existing home sales are an important driver in remodeling, but so are rising home prices. I know a lot of good remodelers out there and I'll be keeping in touch with them over the next few months to see what happens.