INSIGHT: US home builders hope for blue skies

07 August 2008 17:39  [Source: ICIS news]

By Joe Kamalick

 

WASHINGTON (ICIS news)--US home builders are confident that the new federal aid package will pull the housing market out of its long nose-dive and start a slow climb back into blue skies - but a recovery is not certain and it could still be a very bumpy ride.

 

Officials with the National Association of Home Builders (NAHB) said the housing market relief measure signed last week by President George Bush “will provide a real shot in the arm for the housing industry”, in the words of Richard Dugas, president of residential building major Pulte Homes.

 

The housing sector, especially new home construction, is a crucial downstream consuming sector for the chemicals industry. The American Chemistry Council (ACC) estimates that every new home consumes about $16,000 (€10,240) worth of chemicals or chemicals-derived products.

 

The sale of existing homes also helps drive chemicals consumption when older homes are spruced up prior to sale and often redecorated and sometimes expanded by new owners.

 

Among other elements, the law approved by Bush provides a $7,500 tax credit to first-time home buyers and makes $300bn in loan authority available to the Federal Housing Administration (FHA), which insures home mortgages.

 

Between them, those two measures alone could do a great deal to restore consumer confidence, stimulate home buying, stem the tide of foreclosures and help clear the huge inventory of homes for sale, housing industry officials said.

 

“The $7,500 first time buyer tax credit is the centrepiece of this effort, and it will stimulate home buying and reduce the inventory of unsold homes,” said Sandy Dunn, president of the home builders association and a home builder in West Virginia.

 

The US housing market has an inventory of unsold homes equal to 11-12 months of sales at current buying rates. In a normal market, the inventory of available residential properties would be only four or five months’ worth, maybe six.

 

According to NAHB chief economist David Seiders, that unsold inventory includes about 426,000 new homes and nearly 4.5m existing homes. It is the deadweight of that inventory that helps keep the housing market in a teeth-clenching tailspin.

 

The glut of homes on the market depresses prices, which in turn puts more homeowners in a debt crisis with houses that are worth less than their mortgage balance, which triggers defaults and foreclosures and puts still more properties on the market, depressing prices further.

 

NAHB president Dunn said the $7,500 tax credit is “a significant financial incentive that will increase housing demand and get home buyers back into the market and shore up home prices”.

 

Dunn also said the $300bn in loan authority being made available to FHA will help existing home owners avoid loan defaults and foreclosures, which in turn will keep additional vacant homes from coming onto the already flooded market.

 

She said that the benefits of federal housing stimulus was proven in the 1975 congressional action that provided a $2,000 tax credit for new home buyers.

 

“Within nine months, that tax credit helped clear off a record number of unsold homes and helped the country dig its way out of a recession,” Dunn said.

 

Speaking in a conference call with reporters, Dugas said that first-time home buyers made up 40% of the US housing market in 2007, accounting for 2.5m residential property sales.

 

The recovery bill’s focus on first-time buyers is crucial to the plan. (The $2,000 tax benefit provided in 1975 was available to anyone who bought a new home, even those who already owned a house.)

 

Obviously, first-time buyers do not now own a residential property, so they don’t leave an empty house on the market when they purchase a home.

 

Equally important, when a first-time buyer acquires an existing home, the selling family more often than not will purchase another, more upscale dwelling.

 

“This can kick off what we call the ladder effect,” said NAHB’s Seiders. “You start to get a multiplier effect going in the market as new buyers come in and existing home owners trade up - it’s hard to say how far it could run.”

 

Consequently, if the federal recovery package can lure a couple hundred thousand first-time home buyers into the market, it could have exponential effect.

 

There is a caveat to that formula, however. As Seiders notes, among homes for sale now flooding the market there is an unusually high percentage of vacant homes, their previous owners already gone and likely settled in rental apartments. So the ladder effect might not kick in as hoped.

 

For that and other reasons, not everyone is convinced the pump-priming will work.

 

Jim Gaines, research economist at the Real Estate Center at Texas A&M University, said the US housing sector is so big that a slight economic nudge by Congress might not do much.

 

“The market is so big, … it’s like trying to turn an aircraft carrier in the ocean,” Gaines said. “It is not going to turn on a dime.”

 

Housing market watchers worry that even families eager to make their first home purchase will be tempted to wait, anticipating that home prices might fall still further. If enough would-be buyers hold back in that manner, it becomes a self-fulfilling prophecy.

 

But officials at NAHB think - perhaps pray - that the limited window of opportunity for first-time home buyers in the new housing recovery package will pull buyers off the wait-and-see fence.

 

The $7,500 tax credit is only available until 1 July 2009, and that offer may be too good to pass up. 

 

In addition, many home builders and real estate agencies are planning all-out marketing campaigns to alert home shoppers to the federal incentive. Dugas said that Pulte is going to match the federal $7,500 tax credit with a $7,500 discount off the company’s new home prices, creating a $15,000 lure.

 

For first-time home buyers - who typically will buy a home at the lower end of the market, under $100,000 in some areas - a $15,000 chop off the purchase price can be very attractive.

 

NAHB officials said the effect of the federal recovery plan should be apparent within a few months.

 

Ed Brady, an NAHB member and home builder in Illinois, said the federal stimulus package - the Housing and Economic Recovery Act - “will restore consumer confidence, reduce inventories and send a signal that the housing sector is at bottom or very near the bottom”.

 

Or so it is hoped.

 

($1 = €.65)

 

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By: Joe Kamalick
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