INSIGHT: US housing sector may be poised for recovery

29 January 2009 16:17  [Source: ICIS news]

By Joe Kamalick

WASHINGTON (ICIS news)--The US housing market saw a glimmer of hope this week when the inventory of unsold homes fell to a 9.3-month supply in December, but that inventory is expected to swell anew in a few months - and that could be a good thing.

The housing industry, especially new home construction, is a crucial downstream consuming sector for the US chemicals and plastics industries.

Chemical producers and a wide range of other US manufacturers desperately want to see the home construction market recover. But that is not likely to happen until the glut of existing homes for sale is reduced.

Consequently, the fate of the existing homes market is key to a recovery in the major consuming sector of new home construction.

The National Association of Realtors (NAR) reported on Monday this week that sales of existing homes in December were at a seasonally adjusted annual rate of 4.74m units, representing a 6.5% boost from November’s adjusted tally of 4.45m “pre-owned” residences sold.

While that level of sales activity was still 3.5% lower than existing home sales in December 2007, it was a welcome turnaround - especially as December's sales chopped the inventory of homes for sale from an 11.2-month supply in November to a 9.3-month overhang.

In normal economic times, the US inventory of existing homes for sale would show a four- to six-month supply.

“We’re getting there,” said Bernard Markstein, senior economist and director of forecasting at the National Association of Home Builders (NAHB).

Still, Markstein is cautious. “Assuming we’ve seen the worst of it now, and if Congress produces a stimulus plan that helps with housing, we think it looks like existing home sales may be stabilizing, reaching bottom,” he said.

“Then we could see a bottom in housing starts in the second quarter, and then in the second half things beginning to pick up,” he added. “Not a lot, but a righting of the ship, finally.”

Jed Smith, NAR’s managing director for quantitative research, more or less agrees.

“I think we can expect sales to pick up a bit,” Smith said. “On balance, the situation looks favourable for an increase in sales - if [federal economic stimulus] policies take effect and we’re not hit with another major unknown.”

That other major unknown is the prospect of a new wave of home foreclosures - a tsunami of mortgage defaults that could dump hundreds of thousands of additional homes onto the market where there are already some 3.7m residences awaiting new owners.

The first wave of foreclosures was, of course, the sub-prime borrowers, basically unqualified home buyers encouraged by federal policy and the banking sector to take on loans that they really could not afford.

Those foreclosures, however, have peaked and are slowly receding, Markstein believes.

But some fear that a new wave of foreclosures is about to swell, with many homeowners sitting on adjustable rate mortgages (ARMs) that are soon to escalate to higher interest rates and higher monthly mortgage payments for homes that are “under water,” not worth as much as the mortgage debt.

Other precarious loans are known as Alt-A mortgages, so designated because they are not prime “A paper” debt but neither are they sub-prime. 

Many of these loans are interest-only mortgages that, depending on a schedule built into the loan or a re-set triggered by declining property values, are due to convert to full amortization loans plus interest. That means sharply higher monthly mortgage payments for an unknown number of home owners who might not be able to make those payments and will face foreclosure within the next quarter or two.

“That’s where the problem lies,” said Markstein. “We could see a difficult period this year and cause for concern with foreclosures increasing in that Alt-A area.”

“But I hope that that risk will be offset by the stimulus measure that Congress is working on,” he said. 

The housing sector is pressing Congress to grant various forms of foreclosure relief, such as allowing bankruptcy judges to reset mortgage terms (broadly opposed by the banking industry), and a permanent $7,500 tax credit for first-time home buyers or perhaps for any home buyer.

NAR’s Smith also expects language in the final stimulus bill or in a separate Treasury Department action that would provide for federal government purchase of troubled assets at US mortgage banks. In theory, that would free the banks to resume lending.

Smith also notes that the upturn in existing home sales in December took place before the sharp decline in mortgage rates that kicked in at the first of this year, suggesting that still more home buyers may now be poised to take advantage of low property prices and the even lower interest rates.

Ironically, one of the first signs of a recovering housing market likely will be another surge in the inventory of homes for sale.

Markstein noted that the US winter season is not a prime home selling market under any circumstances, and that housing sales invariable pick up with the onset of spring weather.

But the housing inventory also may jump in May through July because existing owners who are reluctant to put their homes on the market now because of low prices may be encouraged by a developing recovery to put their properties up for sale.

“We will see the inventory go up in the spring, that’s the seasonal pattern,” Markstein said.

“The real question is whether the spring inventory build will be more than usual. If so, that will be a positive sign, an indication that people have more confidence in the market.”

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By: Joe Kamalick
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