General housing market to start recovery in early `08

Home sales should bottom out by the end of the first quarter of this coming year, according to a recent study and report from the National Association of Home Builders.

Despite current market sluggishness, the housing market will start to turn around next year for a number of reasons: the overall economy and job growth will continue to move ahead at a decent pace, core inflation is under control, the credit crunch in mortgage markets is showing signs of easing, and the supply-demand equation will be better balanced as builders begin to whittle down their excess inventories.

That's the prediction of David Seiders, chief economist for NAHB. "With the housing sector facing a large backlog of unsold inventory, new construction starts and permits won't begin to move forward until sales firm up. Home sales should bottom out by the end of the first quarter of next year, and housing starts will be up in the third quarter, assuming the inventory overhang stabilizes," he said.

NAHB's short-term forecast is based on several assumptions: skillful management of monetary policy by the Federal Reserve, maintenance of solid growth in personal income and employment, a manageable wave of home mortgage foreclosures and better performance of mortgage markets going forward. The report observed that the long-term potential for housing activity is very good. "By the end of 2009, we may be at a pace of 1.5 million units of new housing production (including manufactured homes). Once we are out of the woods, we should see good growth in front of us - maybe 2 million units per year."

New home sales up

Newly constructed home sales increased in September, recovering from very sluggish activity during the summer months, it was noted in a Commerce Department report. Sales increased by 4.8 percent over the previous month. However, sales were still down by 23 percent over the past year.

At the same time, sales of existing homes and condos fell 8 percent in September to the lowest level in at least eight years, according to the National Association of Realtors. Inventories of existing homes rose 0.4 percent at the end of September to 4.4 million available units for sale, representing a 10.5-month supply at the current sales pace. There was a 9.6-month supply at the end of August.

Buying a home vs renting a dorm for students

An increasing number of parents of college-bound offspring are purchasing a condo or small house in the area of the college for their student's residence while attending the college or university. In some cases, it appears to be more cost-effective than paying for a room in a dorm. The student will often rent out a portion of the purchased unit to one or more students to minimize the investment. When the student's attendance at the college is completed, the unit will be sold, hopefully at a profit.

There are now about 3 million campus houses and condos that have been purchased by students or their parents, according to a report from the National Association of Realtors. That represents about 8 percent of the nation's 37.4 million investment properties, but excludes 6.8 million vacation homes. In addition to the possible financial advantage, owning such a residence gives the student more freedom, and a choice of roommates. For parents, it offers a chance to recoup some of the rising costs of higher education, assuming it turns out to be a good investment.

Many parents are spooked by the unknowns in such an arrangement. Can the extra space be rented at the projected rental amount? Will the student handle his extra freedom responsibly? Will the property later sell at a profit? These and other concerns tend to keep the dorms fully occupied despite the growing trend.

With rising rents and a few available rental units in many markets, the motivation for long-time renters to invest in their own home is growing. Today's low mortgage interest rates often make it possible to pay less on a mortgage than the rental amount for a comparable unit. And, of course, there are tax advantages and potential capital gains benefits in homeownership.

Current market factors are driving a growing trend of converting existing rental units into condominiums. This is primarily seen in or near downtown core areas where many buyers seek a condo residence close to their point of employment. Commuting long distances is becoming less and less attractive, considering the rising cost of gas and increasing traffic congestion in many metro areas. From the investor's perspective, it's more appealing and feasible to develop and sell condos than build rental apartment structures requiring expensive and trouble-prone management services .