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Distressed property overhang dampens homebuilding in Sun Belt, Rust Belt

New homebuilding is on the upswing in some markets, but the Sun Belt and the Midwest's Rust Belt continue to struggle with distressed inventories delaying home starts, real estate analysts said.

New home activity has "been ticking up steadily since spring of last year," said David Crowe, chief economist for the National Association of Homebuilders. But he noted there are places where an overhang of distressed housing continues to weigh down demand for newly constructed single-family homes.

"The inventory of new homes on a national basis is at a historic low," Crowe said. "Inventory issues are all concentrated in the distressed, existing-home sales markets." He says the worst places are "where you might expect … Florida and California." There are also issues in New Jersey, Maryland, Illinois, Delaware and Connecticut, he said.

"Those states have more than a years' worth of distressed property in addition to the normal rollover of property," Crowe explained.  

Celia Chen, an analyst at Moody's Analytics, released a report saying overall stronger job growth and housing demand is encouraging homebuilders to start breaking ground. Still, she said, the overall pace of home construction is well below normal pre-spring activity levels, and distressed homes continue to dampen the prospect of a revived new home market in various regions.

Chen said distressed properties in areas within the Sun Belt, the industrial Midwest are drowning out the potential for a stronger new-home market.

But not all parts of the Sun Belt are struggling. 

Texas is expecting home construction year-over-year in 2012 to rise 10% to 15%, according to Jim Gaines, research economist at the Real Estate Center at Texas A&M University.

Those gains are tied to the fact that Texas has two of the strongest metro areas in terms of job growth — Dallas and Houston, Gaines said. The state's economic downturn wasn't as severe as other parts of the nation, and inventory levels did not increase to the point of creating a massive bubble prior to the meltdown. 

Also on the plus side, single-family building permits began to tick upward in the second half of 2011 for states hardest hit by the foreclosure crisis, according to Census Bureau data compiled by the Federal Deposit Insurance Corp.

Georgia, a state with the most bank failures in the country, saw home permits rise 16% in the fourth quarter. Permits in Florida, a state overrun with a serious foreclosure backlog and vacancy problem, rose 26% in the fourth quarter from one year before after a nearly 22% increase in the third quarter.

Still home starts remain far below their peak in these foreclosure-heavy Sun Belt states. In Florida, for instance, permits are off by 87% from the highest level of activity in 2005.

kpanchuk@housingwire.com

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