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ARE HOMEBUYERS SPOOKED BY GAS?

August 3, 2008 - Herald Palladium

When gasoline prices go up, construction and sales of new houses goes down. At least that's the feeling among some people in and connected to the home construction business. "If you drive by a gas station and see $4 a gallon, you're less likely to buy a new house," said David Campbell, a builder and Realtor and president of the Southwestern Michigan Home Builders Association. "It's a subconscious mind-set. When there's uncertainty, people are less likely to make a move."

"...I talk to different people that were going to build, or contractors who were going to build, and somehow the price of gasoline seems to be an issue," said Bill Boyd, Royalton Township building inspector. "It's taking too much money out. Every one of us has a budget. Where we thought we were going to be in the next year or two, if it was possible to be in the (housing) market, gas prices have taken them out of the market."

Even this year's presidential election is probably having an effect on sales and construction, Campbell said. "People will sit tight for several months in a presidential election year," Campbell said. "We have seen that in the past. But you can definitely tie gas prices into it."

Looking at the slowdown
Whatever the reasons may be, national forecasts for home construction continue to be downbeat, and construction in Southwestern Michigan has slowed as well. Up to a year or two ago, such communities as Lincoln and Royalton townships in Berrien County were hot spots for home builders. New subdivisions sprouted as quickly as the crops they were replacing. Not recently, though.

A check of Herald-Palladium files showed that Lincoln Township, for example, issued a permit for one new house in May, and issued no permits in May 2007. But in May 2006, it issued permits for 14 new houses. Estimated home construction values in Lincoln Township this year are about $4 million through the first six months of 2008, according to reports by township building official James Pheifer. That's less than half the values through the first six months of 2007, which were $8.3 million, he said.

How slow has it become? Pheifer on Monday said the employees in his office were celebrating because the department had received applications for two house permits. "And we may get another one," he said hopefully. At that, July is an improvement over June, when Lincoln Township got an application for one house permit.

Royalton Township in June 2007 was already seeing a slowdown as officials issued only two permits. In June of this year the township issued one permit, Building Inspector Bill Boyd said.

Will things get better soon? "I wish I could predict that," Boyd said, but added things may not get much better if energy costs continue to be so high. Pheifer likewise said he "can't answer that question" about things getting better or worse. What he does know is that the uncertain economy is making people afraid. "It's a response to everything, combined," Pheifer said. "Gas, the mortgage companies, the stock market. Everybody's afraid to spend. "When people do decide to build, they seem to be building less pricey houses, Pheifer said.

Some local numbers
The number of new-house sales of in the Southwestern Michigan area - roughly Berrien, Cass, and Van Buren counties - was 533 through the first seven months of 2006, Campbell said. That fell to 411 in 2007, and this year it dropped to 307, he said. The total value of construction followed suit.

Values through the first seven months of 2006 were $125 million. That went down to $105 million in the same period in 2007, Campbell said. For the first seven months of 2008, it was $81 million, he said.

The average estimated value of the houses has gone up - $234,000 in 2006, $256,000 in 2007, and $265,000 this year - but "some of it is certainly that material costs have gone up," Campbell said. Prices for copper and concrete continue to rise, Many home building products are petroleum based and have gone up as well, he said. Campbell said he used to get letters on price increases once a year, but now he's getting some once a month.

"Anecdotally, a lot of the higher-end houses along the lake, a million on up, those seem to be very strong," Campbell said. "The rest of the market has really fallen off. I don't have the actual numbers to verify that, but from the people in the industry, that seems to be the feeling."

Some subcontractors have said they've laid off some workers, "kind of in response to not having the work available," Campbell said. "We are feeling it more than usual," Campbell said. "We've always been insulated along the lake, but we're seeing a little bit of a pullback now. "The local market may not be flat, but it's certainly slowed, he said.

"I would say we're in a slowdown, but not a bursting of the bubble," Campbell said. "When you talk about bubbles, you're talking about rapid growth. We've never seen rapid growth, just steady growth. That's definitely cooled off a bit. "As far as the root of the national problem, "I think lending has a lot to do with it," Campbell said.

"I personally build some houses on the lower end," Campbell said. "I know a lot of my sales were to people who took advantage of the no-money-down loans. But my people had good luck because they went to credible and reputable lenders. "Now those loans are harder to get, and I think that's a big part of it. It's harder to get the money, though the interest rates are still very good."

State and local perspective
Greg Powell of Powell Construction Services in Royalton Township sees things from both a local and a statewide point of view. He's been a builder for about 24 years, and this year is president of the Michigan Association of Home Builders.

Powell doesn't take much stock in the hypothesis of new home sales being tied to gasoline prices. The foreclosure rate is the real villain in the construction slowdown, he said. Locally, construction is down by about a third from 2007, and that slowed by about a third from 2006, Powell said.

Powell builds homes from $160,000 starter houses up through the $1 million range. However, "In this market, I can hang a screen door for you, if you want," he added.

But while it's a slow market right now, building hasn't stopped, Powell said. "We're in a better spot than most in the state of Michigan, probably due to the fact that we've got money from the Illinois market," said Powell who was just at a state association conference at Boyne Mountain on July 25-27. "Our builders, most of them are working, they're just not working on as much backlog or as much volume."

The same holds true in most areas of the state except the east side, Powell said. Builders in northern Michigan are "doing pretty well," and the Upper Peninsula "is booming, absolutely booming," with vacation and retirement houses and "a lot of new mining activity going on up there," he said.

But on the east side of the state, "those guys are doing bad," Powell said. "Building permits are down by 90 percent in some areas ... The east side of the state is being dragged down by GM and Ford, as we all know."

Still, the mood of the builders at the July meeting was much improved from the spring meeting, Powell said."There is despair on the east side of the state, but it's good in the north and along the water parts," Powell said.

Builders at the July conference said traffic at open houses is up, and the quality of buyers coming through is getting better as well, Powell said. There is more interest from pent-up demand, and that's going to soon translate into more activity, he said.

Even with the foreclosure crisis, "there's a silver lining to that cloud," he said. "If people buy at 50 cents to the dollar, they will have lots of equity." That's going to translate into more activity sooner or later, he said.

Construction employment remains fairly steady, according to Powell. "Most of the people I talk to in our area are saying, 'I'm working to keep my good guys busy,'" Powell said. "They may have let some of the marginal employees go," but there has been no large-scale reduction in employment.

There's no reason for pessimism in Southwest Michigan, Powell said. The area enjoys some insulation from the housing woes in other areas. "A lot of time the papers print a lot of doom and gloom, and people read that," Powell said. "In our area, there's really no reason for it."

Many economists say the best-case scenario calls for the start of a recovery in the first quarter of 2009. Powell said things may start improving before that.

Royalton Township's Boyd sees reason for hope, too."Interest rates are low, and gas is getting lower," he said. "Maybe by Christmas we'll all be wanting to buy new houses, and that would be under our Christmas trees."

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