Overall, the trend right now is replacement over remodeling–swapping out the old for the new rather than doing a total gut job, which can be much more costly.

This year’s Cost vs. Value report found that exterior replacement projects–such as new garage doors and a new entry door–offer some of the best returns at resale, allowing home owners to recoup close to 70 percent or more of the costs of the project at times of resale.

The following are the top, mid-range projects from this year’s report, based on what home owners stand to recoup at time of resale.  Contact Skye Bruce Properties for a complete copy of the latest Cost VS Value Report!

1. Replacing the entry door to steel

Estimated cost: $1,238

Cost recouped at resale: 73%

2. Attic bedroom (converting unfinished attic space into a bedroom with bathroom and shower)

Estimated cost: $50,148

Cost recouped at resale: 72.5%

3. Minor kitchen remodel (including new cabinets and drawers, countertops, hardware, and appliances)

Estimated cost: $19,588

Cost recouped at resale: 72.1%

4. Garage door replacement

Estimated cost: $1,512

Cost recouped at resale: 71.9%

5. Deck addition (wood)

Estimated cost: $10,350

Cost recouped at resale: 70.1%

6. Siding replacement (vinyl)

Estimated cost: $11,729

Cost recouped at resale: 69.5%

Content courtesy of  Melissa Dittmann Tracey, REALTOR® Magazine

There had been a steady increase in foreclosures each year dating back to 2006.

The market continues to improve as inventories of homes are down in many neighborhoods and pending sales are up!

 Questions about the Richmond area real estate market?  Contact Skye Bruce Properties, one of the Top 10 Volume Real Estate Teams in all of Central Virginia!

The most expensive was a stately 10000 square foot home located near the Country Club of Virginia in Richmond. The home sold for $2,514,500 and featured 7 bedrooms, 8 full baths and 2 half baths. Built around 1860 the home sits on over 3 acres and has a pool.

Here is a Top 10 summary of the most expensive homes sold in the Richmond area in 2011. (Richmond, Hanover, Henrico, Chesterfield, Goochland and Powhatan)

Not sure if analyzing the most expensive homes in Richmond is much of a way to gauge the market, but it sure is fun to know what the really big homes sell for. If you’re looking to buy or sell a home, understanding the market and neighborhood where you are buying or selling is critical. At Skye Bruce Properties we constantly analyze the market data and are experts in making sense of it.  Contact Skye Bruce Properties for valuable advice when buying or selling real estate in the Richmond area!

Great article below from WSJ.com posted in 10/15/11. Now is the time for sure to buy. Prices in the Richmond area are close to bottom and interest rates are below 4 percent. The moment we reach bottom and there is the slightest improvement,interest rates will jump quickly to 5 1/2 – 6 percent.  ~~Skye Bruce Properties

U.S. house prices have plunged by nearly a third since 2006, and homeownership rates are falling at the fastest pace since the Great Depression.

The good news? Two key measures now suggest it’s an excellent time to buy a house, either to live in for the long term or for investment income (but not for a quick flip). First, the nation’s ratio of house prices to yearly rents is nearly restored to its prebubble average. Second, when mortgage rates are taken into consideration, houses are the most affordable they have been in decades.

Two of the silliest mantras during the real-estate bubble were that a house is the best investment you will ever make and that a renter “throws money down the drain.” Whether buying is a better deal than renting isn’t a stagnant fact but a changing condition that depends on the relationship between prices and rents, the cost of financing and other factors.

But the math is turning in buyers’ favor. Stock-oriented folks can think of a house’s price/rent ratio as akin to a stock’s price/earnings ratio, in that it compares the cost of an asset with the money the asset is capable of generating. For investors, a lower ratio suggests more income for the price. For prospective homeowners, a lower ratio makes owning more attractive than renting, all else equal.

Nationwide, the ratio of home prices to yearly rents is 11.3, down from 18.5 at the peak of the bubble, according to Moody’s Analytics. The average from 1989 to 2003 was about 10, so valuations aren’t quite back to normal.

But for most home buyers, mortgage rates are a key determinant of their total costs. Rates are so low now that houses in many markets look like bargains, even if price/rent ratios aren’t hitting new lows. The 30-year mortgage rate rose to 4.12% this week from a record low of 3.94% last week, Freddie Mac said Thursday. (The rates assume 0.8% in prepaid interest, or “points.”) The latest rate is still less than half the average since 1971.

As a result, house payments are more affordable than they have been in decades. The National Association of Realtors Housing Affordability Index hit 183.7 in August, near its record high in data going back to 1970. The index’s historic average is roughly 120. A reading of 100 would mean that a median-income family with a 20% down payment can afford a mortgage on a median-price home. So today’s buyers can afford handsome houses—but prudent ones might opt for moderate houses with skimpy payments.

For example, the median home in the greater Phoenix market, including houses, condos and co-ops, costs $121,700, according to Zillow.com. With a 20% down payment and a 4.12% mortgage rate, a buyer’s monthly payment would be about $470. Rent for a comparable house would be more than $1,100 a month, according to data provided by Zillow.com.

Of course, all of this assumes mortgages are available—no given now that lending standards have tightened. But long-term data on down payments and credit scores suggest conditions are more normal than many buyers think, according to Stan Humphries, chief economist at Zillow. “If you have good credit, a job and a down payment, you can get a mortgage,” Mr. Humphries says. “There’s more paperwork and scrutiny than five years ago, but things are pretty much like they were in the ’80s and ’90s.”

Not all housing markets are bargains. Mr. Humphries says Zillow has developed a new price/rent ratio that uses estimates for each individual property rather than city medians, to better reflect the choices facing typical buyers. A fresh look at the numbers suggests Detroit and Miami are plenty cheap for buyers, with price/rent ratios of 5.6 and 7.7, respectively. New York and San Francisco are more expensive, with ratios of 17.6 and 17.2, respectively. The median ratio for 169 markets is 10.7.

For investors seeking income, one back-of-the-envelope way of seeing how these numbers stack up against yields for other assets is to divide 1 by the price/rent ratio, resulting in a rent “yield.” The median market’s rent yield is 9.3% and Detroit’s is 17.9%.

Investors would then subtract for taxes, insurance, upkeep and other expenses—costs that vary widely. But suppose total costs were 4% of the purchase price. That would still leave a 5.3% rent yield in the typical market. With the 10-year Treasury yield at 2.2% and the Standard & Poor’s 500-stock index carrying a dividend yield of 2.1%, rents for residential housing in many markets look attractive.

A few caveats are in order. First, not all transactions are average ones. Even in low-priced markets, buyers should shop carefully. Second, prices could fall further. Celia Chen, a senior director at Moody’s Analytics, expects prices to drop 3% before bottoming early next year and rising slowly thereafter. “If the economy slips back into recession, however, we could easily see a 10% drop,” Ms. Chen says.

And property “flipping” can be dangerous even when prices are rising. That is because, absent a real-estate boom, house price gains simply aren’t that exciting. Research by Yale economist Robert Shiller suggests houses more or less track the rate of inflation over long time periods.

Houses aren’t the magic wealth creators they were made out to be during the bubble. But when prices are low, loans are cheap and plump investment yields are scarce, buyers should jump.

Click here to read article at WSJ.com

The May 3-9 telephone survey found that 75 believe “that owning a home is the best long-term investment they can make and is worth the risk of ups and downs in the housing market.”

Survey feedback on home ownership was very positive….

• 95 percent of the home owners said they are happy with their decision to own a home
• Of non-homeowners, 73 percent said owning a home is one of their goals
• 80% of home owners would advise a close friend or family member just starting out to buy a home

Good signs for a still struggling national real estate market!  Considering buying or selling a home in the Richmond area?  Contact Skye Bruce Properties for detailed information about the area real estate market and specific neighborhoods.

Compare the neighborhoods you like, keeping in mind the advantages of living in a planned community. There are many more questions to ask, since location is a matter of personal preference, but the following basics will get you started as you begin your home search…

Architectural integrity. A planned community establishes master architectural guidelines for homes and community amenities, which ensures that neighborhoods are well designed and complement each other for the long term. These guidelines create a unified theme, but with variations so that each neighborhood is unique. Long-term community specifications maintain the integrity of an attractive street scene, as well as landscaping and facilities.

Amenities that enhance quality of life. Master-planned communities are about convenience – from homes that don’t require extensive maintenance to amenities that make is easy to enjoy long weekends and quality family time. Specific amenities might include pools, tennis courts, hike-and-bike trails, recreation centers, gyms, sports fields, golf courses, clubhouses and much more. Smart community planning also considers views and the preservation of natural open space, as well as convenience for residents. For example, a planned community like Wyndham will typically be closer to good schools, commercial/retail centers, and major transportation corridors.

Investing in your future. Homes in master-planned community like Wyndham tend to maintain their value a little better than other developments. Homebuyers see them as more desirable places to live because they’re convenient to work, school and amenities. Your homeowner’s association dues are truly an investment in the future and contribute to the ongoing maintenance of community landscaping, pools, parks, recreation centers and other common area amenities. As the years pass, the homeowners association refreshes and renovates amenities as needed so the community continues to maintain its level of quality and desirability.

Sense of community. There’s also a strong sense of community in Wyndham, where families and children gather at the playground or at a community event and where a pool or recreation center is often the center of activity. Wyndham has a on-site elementary school (Shady Grove) and retail centers such as Short Pump Town Center are minutes away, making handling life’s daily activities easy and convenient.

You can feel the pride of good planning in the way the residents feel about their community. They own much more than a comfortable home in a beautiful neighborhood. They have a great place to live — whether they are starting a family, raising children, enjoying a new phase of life as a couple or cherishing their privacy.

Check out these FEATURED HOMES in Wyndham!

12104 Drumore Court Glen Allen, VA 23059   MLS #: 1025184 $549,950
Sq. Ft.: 3,743  Bed: 4 + Bonus  Bath: 3 1/2

Absolutely beautiful home sits on a quiet cul-de-sac. Features 2 Story Foyer, formal Living & Dining Rooms, large Family Room with built in bookcases and recessed entertainment cabinet, Sun Room with vaulted ceiling & skylights, designer Kitchen with custom cabinets & granite countetops, vaulted eat In area, front & rear staircases, Master with tray ceiling, finished 3rd floor with large Recreation Room with wet bar and a full bath. New HVAC unit for 1st floor.

Directions: Nuckols Road to Wyndham Park Drive. Right onto Old Wyndham Drive. Left onto Morestead. First right onto Drumore Court.

6020 Chestnut Hill Drive Glen Allen, VA 23059  MLS #: 1107210  $399,950
Sq. Ft.: 3,232  Bed: 4 + Bonus Room  Bath: 3 1/2

Gorgeous transitional with 2 Story Foyer, formal Living & Dining Rooms, bright Kitchen with tile floor & granite countertops, Family Room with built in bookcases with granite tops, large Master Bedroom with walk in closet and luxurious Master Bath, hall bathroom with tile, finished 3rd floor with 5th bedroom or large Bonus Room and full bathroom with tile, fenced backyard, security system and much more!

Directions: Nuckols Road to Wyndham Lake Drive. Left onto Old Wyndham Drive. Left onto Chestnut Hill Drive.

6100 Kelston Green Drive Glen Allen, VA 23059  MLS #: 1104954   $337,000
Kelston Green At Wyndham
Sq. Ft.: 2,131  Bed: 3  Bath: 2 1/2

Absolutely immaculate Wyndham home with no exterior maintenance! Features include formal Living and Dining Rooms with hardwood floors, 2 Story Family Room with neutral carpet and gas fireplace, updated Kitchen with new granite countertops and bright Eat In Area, Master Bedroom with vaulted ceiling and His/Her walk in closets, luxurious Master Bath with jetted tub and enclosed shower, two additional bedrooms, hall bathroom with tile, aggregate patio, storage shed and much more!

Directions: Nuckols Road to Wyndham Lake Drive. Right onto Old Wyndham Drive. Right onto Kelston Green Drive.

These homes are featured exclusively by Skye Bruce Properties!
Listing Agent: Skye Bruce   Phone: 804-539-8571   Email: skye@skyebruce.com

4934 Willows Green Lane Glen Allen, VA 23059 Open House Sunday, May 15, 2pm-4pm

$435,000 Sq. Ft.: 4,084 Bed: 5 + Bonus Room Bath: 41/2 Gorgeous brick front transitional home in Twin Hickory has open and inviting living spaces with tasteful decor. Features include formal Living & Dining Rooms with architectural columns, open Kitchen with granite counters & custom cherry cabinets, Family Room with vaulted ceiling & surround sound, 1st floor Master with vaulted ceiling & His/Her walk in closets, luxurious Master Bath, four spacious bedrooms with Jack & Jill baths on 2nd floor, built in desk on 2nd floor landing, open staircase to 3rd floor which has a huge, bright Bonus Room and 4th full bath! Upgrades and extras throughout this beautiful home!MLS #: 1111015
12008 Ivy Hollow Court Glen Allen, VA 23059

$429,950 Sq. Ft.: 3,316 Bed: 4 + Bonus Room Bath: 3 1/2  Brick front Twin Hickory home features 9′ ceilings & hardwood floors on 1st floor, 2 Story Foyer with balcony overlook, formal Living & Dining Rooms, huge Family Room with gas fireplace & recessed TV nook, open Kitchen with cherry cabinets, corian counters & stainless appliances, 1st floor Laundry/Mud room, Master Bedroom with His & Her walk in closets & luxurious Master bath, three additional bedrooms on 2nd floor, bathroom with tile, open staircase to 3rd floor which has large Bonus which could be used as 5th bedroom, walk in closet & 3rd full bathroom. Detached 2 car garage offers additional storage space & backyard is fenced. MLS #: 1109180
11605 Hickory Lake Terrace Glen Allen, VA 23059

$519,900 Sq. Ft.: 3,888 Bed: 5 Bath: 3 1/2Gorgeous brick front home with breath-taking views of the Twin Hickory pond and Swim & Racquet club.This home sits on cul-de-sac lot w/ manicured yard that is very private in the back. Features include a dramatic 2 Story Foyer, classic formal rooms with architectural columns, 1st floor Study, designer Kitchen with granite counters & top of the line appliances, very spacious Family Room with great natural light, Master with Sitting Area & His/Her walk-in closets, luxurious Master Bath, spacious bedrooms,open staircase to finished 3rd floor which has Bonus Room, Bedroom & 3rd full bath. Outside you’ll find a nice sized & very private backyard.Upgrades include custom mouldings, security system, large capacity water heater, 3 Unit HVAC, full irrigation system. Just a short walk to clubhouse! MLS #: 1111023

Offered exclusively by Skye Bruce Properties!

Contact Listing Agent: Skye Bruce for more information or to view these homes!  Phone: 804-539-8571 Email: skye@skyebruce.com

For many homeowners the notion of home maintenance is overwhelming. They grew up watching their parents spend weekends with honey-do lists, and they are not going to follow in their footsteps. They don’t want to do that stuff. They want to be watching the kids on the soccer field Saturday morning, they want to hang out at the local Starbucks Sunday morning with the paper or their i-pad!

While the baby boomers entered homeownership with the assumption that 40 years of Saturdays were spoken for, Generation X’ers (ages 30 to 45) and Gen-Y’ers (ages 18 to 29) have other things to do. These young people are lured by the low home prices and mortgage rates into homeownership. But, they are not lining up to buy a John Deere riding mower.

A condominium or townhouse is the perfect alternative for many of these buyers. They have no peer pressure to have a single-family house, they’re marrying later, having kids later. Many buying as single people. When it comes to home maintenance, they want to know: Who is going to do it for me?

The Richmond area has numerous condo, townhome and patio-home communities, but remember location is always key to safeguard your real estate investment.  There is probably no better community for maintenance free living than the planned development of Wyndham in the Glen Allen area of Richmond.  In Wyndham you will find 7 different maintenance free neighborhoods offering an array of choices and styles. One of the the most popular neighborhoods is Kelston Green adjacent to the beautiful Dominion Club golf course. All homes in Kelston Green are detached so it feels like a traditional single family home, but comes with the benefits of maintenance free living.

Featured Property in Kelston Green

Skye Bruce Properties is proud to offer this absolutely immaculate Kelston Green/Wyndham home with no exterior maintenance only steps from the 12th tee of The Dominion Club! Features include formal Living and Dining Rooms with hardwood floors, 2 Story Family Room with neutral carpet and gas fireplace, updated Kitchen with new granite countertops and bright Eat In Area, Master Bedroom with vaulted ceiling and His/Her walk in closets, luxurious Master Bath with jetted tub and enclosed shower, two additional bedrooms, hall bathroom with tile, aggregate patio, storage shed, plus much more! View more details about this property including a virtual tour at SkyeBruce.com.  MLS#1104954

Email us at Skye Bruce Properties to learn more about available maintenance-free homes in the Richmond area!

National and Local Economic Overview
The national economy continued to show strength by several measures as 2011 has begun, and the Central Virginia region appears to be gaining some economic momentum as well. At the national level, the economy would be gaining even more traction were it not for the problems in the Middle East and subsequent increases in oil prices, and the continued malaise of thehousing market at the national level. After a very weak job market in Central Virginia, it appears that the region is turning the corner and is now adding jobs and should show growth in 2011. During the recession only the Health and Education Services Sector added jobs, but over the 12 months from March 2010 to March 2011, most sectors added jobs, led by the Professional and Business Services sector. The Construction and Financial Services sectors have almost returned to growth and should turn positive in the second quarter. The largest job losses at the national level as of March were in State and Local Government – a sector that usually lags economic recoveries.

Central Virginia’s economic conditions began to improve in 2010 and the jobs picture has improved significantly, although growth is very modest as of early 2011. Following a loss of 24,900 jobs in 2009, the losses began moderating in early 2010 and job growth started again in the summer, albeit modestly, and had a small loss in December before turning up again with a growth of 2,900 jobs from February 2010 to February 2011. On a quarterly basis, the region’s growth showed a spurt in the 2nd quarter of 2010 and a drop in the fourth quarter. The first quarter of 2011 is expected to be flat and the forecasts are for growth in each of the remaining three quarters of 2011 to be in the range of 2,500 to 3,500 jobs each quarter.

In looking at the 12-month period of February 2010 to February 2011, the Richmond metro area’s job growth was led by the Professional and Business Services sector with +3,000 jobs and the construction sector with +2,700 jobs. The Financial and Retail Trade sectors continue with declines reflecting the business cycle. As the overall job situation continues to improve, it can be expected that Retail Trade and Financial sectors will also begin to add jobs again. State and Local Government had the largest decline with -2,600 jobs. State and local government sector lags business cycles because of the strong dependence on property tax revenues which lag the business cycle because of the timing of the property assessment process. Property tax assessments will not recover until the overall housing market recovers and values rise.

Central Virginia Area Housing Market

Homes sales were up in the first quarter of 2011 compared with the first quarter of 2010, but prices continued to fall. The prices of sold homes and prices of active listings suggest there remains a substantial pool of foreclosures and short sales in the market. While buyers are returning to market and finding good deals, several factors will make it challenging to reduce the glut of foreclosures. The speed with which the inventory of foreclosures and short sales is drawn down will depend on the continued recovery of the regional economy, as well as policy decisions at the Federal level and practices within the banking system. It will likely take until the end of 2011, if not beyond, to work through the inventory of distressed and foreclosed properties.

Home Sales and Prices

Sales activity in Central Virginia was brisk in early 2011. In the Central Virginia MLS, a total of 2,269 homes were sold in the first quarter of 2011, compared with 1,988 in the first quarter of 2010. These sales figures represent an increase of 14 percent over the year. Sales were strongest in the Richmond Metro Area but still lagged in the Tri Cities Area. In the Richmond Metro Area, there were 1,889 homes sold, an increase of 15 percent over the first quarter 2010 sales. However, in the Tri Cities Area, sales in the first quarter were down two percent compared to the same quarter last year. Despite strong sales activity, prices continued to fall. In the first quarter of 2011, the average price of a home sold in the Central Virginia area was $200,525, which was down eight percent from the average sales price in the first quarter of 2010. The median price in the first quarter of 2011 was $173,500, down seven percent from a year ago. Sales prices were down in nearly every jurisdiction in the Central Virginia region. In the Richmond Metro Area, average and median prices were down nine percent. In the Tri Cities Area, the average price in the first quarter of 2011 was 13 percent lower than in the first quarter of 2010 and the median price was down 19 percent.

The main drag on home prices is foreclosures. A substantial share of all sales in the first quarter of 2011 was foreclosures and the persistent inventory of foreclosures and short sales continues to put downward pressure on prices. In the Central Virginia region, nearly one quarter of all homes were sold for less than $100,000 in the first quarter of 2011. In the Richmond Metro Area, about 20 percent of homes sold in this price range. In the Tri Cities Area, a remarkable 48 percent of all sales were for less than $100,000 in the first quarter of 2011.The data indicates that lower priced homes have become a growing share of all home sales. The rise in the number of very low priced homes suggests that the foreclosure and short sale inventory is still relatively large and could take many months to clear out. Brisk sales activity will help to remove these properties from the inventory. However, processing delays at the banks and uncertain government regulatory activity could delay this drawn down.

Pending Sales

Pending sales are typically a leading indicator of final sales. In the first quarter of 2011, pending sales were down compared to the first quarter of 2010. In the Central Virginia region, there was a total of 3,077 pending sales in the first quarter of 2011, compared with 3,192 in the same quarter last year. The numbers of pending sales were down by three percent in the Richmond Metro Area and by ten percent in the Tri Cities Area.

Active Listings

One sign that inventories in the region are being drawn down slightly is the trend in active listings. At the end of the first quarter of 2011, there was a total of 8,617 active listings on the market. The current level of inventory is lower than at the end of first quarter 2010 when there were 8,897 active listings. Lower levels of inventory, coupled with increasing sales activity, are positive signs for the housing market. However, the current inventory of active listings contains a greater share of lower priced homes, including foreclosures and short sales. This trend suggests that there is still a substantial number of foreclosed properties that have not yet come to market.

Outlook for 2011

The fundamentals for an improving housing market are present in the Central Virginia region. Job growth is starting to improve and the region is adding relatively high wage jobs in the Professional and Business Services Sector. Inventories of homes for sale are lower than they have been in many months. Interest rates are still at historically low levels. There is pent-up demand for housing, as potential buyers have been waiting to see if the market has hit bottom. However, several challenges remain that will lead to a very slow recovery in the housing market throughout the year. The biggest obstacle to recovery is the level of foreclosures. The data on active listings suggest that foreclosures are a growing share of homes on the market. And the currently listed foreclosed properties may only be a small share of the total inventory. The foreclosure process has been slowed by problems with bank procedures and changes to Federal regulation. Thus, the shadow inventory continues to grow. In addition to the high level of foreclosures, tighter credit requirements are another impediment to recovery in the housing market in 2011. Some potential buyers continue to have difficulty obtaining financing. A potential but partial offset to these challenges could be forecasts for interest rates. While interest rates are currently low, they are projected to rise by the end of the year. Potential buyers who are waiting until the market hits bottom may be motivated to move off the sidelines as 2011 progresses

Thinking of buying or selling?  Contact Skye Bruce Properties for sound advice when buying and a proven marketing system when selling your home.  Skye Bruce Properties is one of the 10 largest volume real estate teams in Central Virginia!

Content and data from the Central Virginia MLS

Positive news in real estate for new home starts from YAHOO Real Estate! We are seeing a similar rise in the Richmond area.  Local builders are reporting more starts and an increase in activity in Central Virginia. 

Housing Starts rose in March to a seasonally adjusted annual rate of 549,000 from 512,000 in February, an increase of 7.2%. Also, the February numbers were revised sharply higher from 479,000, so it is possible to see the increase as 70,000, or 14.6%. Relative to a year ago they are down 13.4%. Quite frankly, a year ago was also a pretty lousy time for homebuilders, so the fall is off a pretty easy comp.

If one looks at only single-family houses, the picture was more or less the same, rising to 422,000 from 392,000 in February, a rise of 7.7%, and down 21.1% from a year ago. February starts were revised up from 375,000, so single-family starts are up 12.5% from where we thought they were last month.  The volatile multi-family (Apartment, Condo and Co-op) sector, rose by 14.7% to an annual rate of 102,000 (revised up from 96,000). Year over year, multi-family starts are up 28.6%.

The total starts number was well above consensus expectations of a 520,000 annual rate. However, in any absolute sense, the level of housing starts is just plain awful. It is easy to get a nice percentage gain if you start with a low enough base.

The extremely weak rate of new home construction is a major drag on the economy. It is the principal reason that this recovery feels so anemic. The silver cloud is that fewer starts means that there are fewer houses added to the inventory of houses looking for buyers.

We still face an inventory glut, so a weak homebuilding industry is a key part of the repair process for the housing market. The inventory glut is concentrated in the used home segment of the market, and that is also where the “shadow inventory” resides.

New home inventories are actually near historic lows in absolute terms. Used homes are pretty good substitutes for new homes, so that is a bit of a distinction without a difference. Housing Starts peaked in June of 2006 at an annual rate of 2.273 million. We are thus 75.8% off of the peak levels. Single-family starts are 77.5% below peak levels.

The rebound this month will slow the adjustment process, but also means more economic activity over the next few months. On balance, I have to see the increase in starts as being a good thing, but if New Home Sales do not pick up, the new homes being built will simply make the inventory situation worse.

Housing Starts Vitally Important

It is hard to overstate just how important housing starts are to the economy. Yes, at this point, residential investment has declined to the point where it looks almost insignificant — just 2.25% of GDP in the fourth quarter, down from 6.34% of GDP at the height of the housing bubble. However historically, residential investment — of which new home construction is the largest part — has always been the main locomotive in pulling the economy out of recessions.

Take a good hard look at the first graph below (from http://www.calculatedriskblog.com/) and the relationship between when the lines bottom and the light blue recession bars. If you want to know why this recovery seems so anemic, look no further than this graph. Even the 2001 recession, which was not caused by a housing downturn, saw a sharp acceleration in housing starts as the recession came to an end.

Of course, since starts were jumping but were not starting from a depressed level, that boom later became known as the housing bubble that put us in this mess to begin with. Every other recession was preceded by a sharp fall in housing starts, every other recovery saw housing starts lead the way.

This is no coincidence. Each new home built generates a huge amount of economic activity. It put construction workers back to work, and construction workers have been particularly hard hit in the Great Recession, accounting for over 25% of the total jobs lost, even thought they were less than 6% of the total workforce when the recession started.

That is just the direct construction jobs, but lower building activity also means fewer jobs in the factories that produce building materials, which are counted as manufacturing jobs. Clearly jobs in mortgage finance are also affected by the housing slowdown, but they are not included in that one out of four jobs lost figure.

As they and the construction workers go back to work they are also going to have more money to spend, perhaps even go out to eat, thus creating jobs for cooks, waitresses and busboys. Housing starts are not just about profits and jobs at D.R. Horton (NYSE: DHI – News) and the other homebuilders, but about jobs and profits at firms as diverse as Plum Creek Timber (NYSE: PCL – News), Fortune Brands (NYSE: FO – News) and Berkshire Hathaway (Boston: BRK-A – News). Indirectly, it even helps Wal-Mart (NYSE: WMT – News).

Why Housing Is Central

Why is housing so central, as opposed to other industries? Why does it hold the key to the economy booming or busting? Because it is exquisitely sensitive to interest rates, or at least it was, before the avalanche of houses in foreclosure simply swamped the housing market. Even near-record low mortgage interest rates don’t seem to be moving the needle.

The simple fact is that during the housing bubble we built far too many homes, and we now have a glut of empty homes around the country. Most estimates put the excess vacancies at between 1.2 to 1.5 million (including rental units).

The next graph (also from http://www.calculatedriskblog.com/) shows the total (homeowner and rental) vacancy rate over time, relative to housing starts. While it is off its peak, it is still far above normal. In such a situation, it seems economic folly to simply build more houses and add to the glut.

But if we don’t build houses, the economy remains stuck in a rut. From a strict “allocation of resources point of view, we would want to see slow housing starts until the vacancy rate fell back to more normal levels (say under 4.0%).

Thus, one can argue that in the long term, low housing starts are a good thing, as it means fewer new homes adding to the glut. That, however, is extremely cold comfort to the millions of construction workers who are out of work. It is also going to be very difficult to create a sustained growing economy if home building continues to be a drag.

If residential investment (of which new home construction is the largest part) had simply remained at the depressed levels of the second quarter, rather than declining further, the economy would have grown at a 3.25% rate in the third quarter rather than at just 2.50%. In the fourth quarter, residential investment was actually very slight positive contributor to growth, adding 0.08 points of the 3.20 total.

The residential investment locomotive was not pulling very hard, but at least it was no longer acting as a brake. That resulted in a 0.83 point swing in growth contribution, which was more than the total acceleration of 0.60 points from the third quarter to the fourth quarter.

The increase in March, combined with the upward revision to February means that housing starts averaged 563,000 in the first quarter, up 5.4% from the 534,000 average in the fourth quarter. This suggests that Residential Investment will be a positive contributor to first quarter GDP growth, although not a huge one.

Results by Region

For the month, three of the four census regions posted increases, but all were down from a year ago. The Midwest was the strongest, with total starts rising 32.3% on the month, but down 11.8% year over year. The West was also strong, with a 27.6% increase, but is the weakest year over year, down 18.4%. The Northeast posted a gain of 5.4% for the month, and is down 10.6% year over year.

The South, which is by far the largest of the four regions, accounting for 54.1% of all starts for the month, was the only place where starts declined. For the month starts were down 3.3% and are off 12.4% year over year. The West, on the other hand, was down 28.0% on the month and off 40.6% year over year.

Building Permits

The rise in starts is encouraging, and fortunately, it is likely to continue. The best leading indicator of housing starts are Building Permits. There the news was also modestly upbeat, at least from a near-term economic growth point of view. (Or worse from a long-term repair of the housing market point of view).

For the month, total permits rose 11.2% to an annual rate of 594,000 and were down 13.3% year over year. That was above the consensus expectations for a 540,000 rate. February was revised up, from a 517,000 rate to 534,000. The strength was mostly in the multi-family part of the market while the gains in single-family permits were more modest. Single family permits were up 5.7% on the month, and down 25.3% year over year.

Multi-family permits soared 43.0% on the month and are up 28.1% year over year. The permit rate is above the start rate, so we can probably look forward to at least a bit more upward momentum in starts in April and May. The rebound is not likely to be all that strong though as the permit rate is just 8.1% above the start rate.

Regionally, the West was the strongest for the month, with permits up 37.1% on the month but off 7.6% year over year. The Midwest saw permits rise 6.9% for the month and off 20.5% from a year ago. The South, the largest of the four regions, rose 6.3% for the month but down 14.6% from a year ago. The Northeast, the smallest of the four regions, was unchanged on the month, and down 5.9% year over year.

There is a certain level of ambiguity about if a rise in starts is good news or bad. We need less supply to help the market clear, but in the meantime, the economy is going to be stuck in limbo, unless we can find another locomotive to help pull us forward. The one we have always relied on in the past is clearly derailed.

Every housing start represents a lot of economic activity, and the effects go far beyond the bottom line of the big home builders. Housing starts are an important part of the job picture, and construction has historically been an important source of relatively high paying jobs for those without a lot of formal education. The conundrum is how to get these people back to work without simply adding to the existing housing glut.

Housing & the Political Environment

Additional government spending on infrastructure would be the logical solution. After all, we have huge needs to rebuild out crumbling infrastructure. Better infrastructure would enhance our long-term economic competitiveness. The government would not be competing for resources with the private sector, it would be competing with idleness. Even with the recent rebound in interest rates, the cost of financing the infrastructure rebuild would be extremely low, give that T-note yields are in any historic perspective, low across the yield curve.

However, in the current political environment that is not gong to happen, as Congress is more likely to slash existing infrastructure spending rather than increase it. This is following the economic theory that putting an incremental $100,000 into the after-tax income of a mid-level Wall Street investment banker will instill more confidence in the economy that they will produce more jobs, than putting an unemployed construction worker back to work fixing our bridges so they don’t collapse on us. I don’t think that is the case, and that employing the unemployed would be a better route to regaining confidence.

Eventually, the combination of a rising population, and higher household formation will absorb the excess inventory, and we will be able to once again increase housing construction. Household formation is economist speak for kids moving out of their parents houses and getting a place of their own. To do so takes a job, and one that pays enough to support having your own place.

In the past, residential construction itself provided a lot of those jobs. That produced an upward spiral. This time around, the jobs have to be created in other parts of the economy to increase the household formation rate, and absorb the excess inventory, which makes the process slower. This process should probably hit the rental market first, and we are starting to see that.

Most of the decline in the vacancy rate shown above has come from the rental side of the housing market. After all, kids moving out of Mom’s basement are more likely to first move into a rental apartment than to buy a house. The decline in the rental vacancy rate is thus a positive omen for the future.

The day will come when housing is once again a big positive contributor to economic growth. It is not really sustainable over the long term to have total housing starts running at substantially lower levels than we saw in the 1960’s. Back then the population of the country was around 200 million, now it is north of 310 million.

That day, however, is not today, or in the near future. It is possible that it might happen in the second half of 2011, but more likely in 2012. For the time being, the best we can really hope for is that it stops being a brake on the economy. That appears to be happening.

CONTENT COURTESY OF YAHOO REAL ESTATE