INSIGHT: US housing recovery to advance - maybe

20 May 2010 18:25  [Source: ICIS news]

By Joe Kamalick

US housing market shows promise but faces risks tooWASHINGTON (ICIS news)--The US housing sector recovery should gain strength in the second half this year and into 2011 - assuming employment improves, consumers keep spending, the euro doesn’t fail and the US economy doesn’t collapse under its increasing debt load.

So, things are looking sort of okay. Maybe. Could be.

David Crowe, chief economist for the National Association of Home Builders (NAHB), told a press conference that he expects there will be another modest dip in new home construction and sales in the next month or two but that a general recovery in the residential construction market will continue through this year and into 2011.

Speaking at the association’s regular semi-annual economic and construction forecast, Crowe noted that US housing starts rose significantly in April, following more or less steady improvements beginning in mid-2009 and into the first quarter this year.

“The sales improvements in mid-2009 and most recently this year were in large part due to the federal home buyer tax credit,” Crowe said. “The tax credit certainly did do the job.”

Beginning in early 2009 the US Congress authorised an income tax credit of up to $8,000 (€6,560) for home buyers, an arrangement that expired at the end of April.

Crowe said that the sharp jump in April’s housing starts reported by the Commerce Department on Tuesday was largely due to home buyers rushing to make purchases before the tax credit expired.

“We will see a bit of a pause now due to the expiration of the tax credit in April,” Crowe said, noting that the home buying and construction rush seen last month probably included some sales that otherwise might have occurred in May and June.

“But I expect the recovery in housing starts to continue,” Crowe said. “It will be driven by continuing low interest rates, good housing prices, affordability, the improving employment picture and pent-up demand.”

The housing market is a key downstream consumer sector for the chemicals industry, driving demand for a wide variety of chemicals and chemicals-based products such as plastic pipe, insulation, paints and coatings, adhesives and synthetic fibres, among many others.

The American Chemistry Council (ACC) estimates that each new home built represents some $16,000 worth of chemicals and derivatives used in the structure or in production of component materials.

Although the US unemployment rate remains at nearly 10%, the economy has been adding jobs over the last few months, Crowe noted. “People are more comfortable about their employment, especially those who never lost their jobs but until now have been worried about losing their jobs and now are more willing to move forward with a home purchase,” he said.

He also pointed to improving retail sales figures, which are back to levels last seen in 2006 before the recession.

“This is an indication that people are again willing to spend, and it includes furniture, appliances, automobiles,” Crowe said.  “Major purchases are being made again, and this is a measure of consumer confidence.”

He noted too that there are initial signs that foreclosures are beginning to ease as the number of home owners who have missed a home-loan payment for the first time is declining, indicating that fewer mortgages will be going into default.

He said he expects home mortgage interest rates will remain low through this year and into 2011 and will not likely exceed 6% this year or 6.3% by the end of 2011.

Crowe also cited the NAHB’s own recent survey of its member contractors, showing that home builders are increasingly confident of improving demand, construction and sales of new single-family homes over the next six months.

Joining Crowe in this week’s semi-annual NAHB housing and economic outlook, economist Chris Varvares said he expects US gross domestic production (GDP) to reach a growth rate of 3.7% for the full year 2010.

While that rate of economic expansion is at or above the usual trend growth rate of 3% to 3.5%, Varvares said he does not expect the overall economy will grow enough to put a lot of downward pressure on the nation’s stubborn unemployment rate.

Varvares, president of Macroeconomic Advisers, said that “this will not be a great jobs recovery, but it will be enough of a recovery to maintain consumer spending and generate housing demand”.

He said new home construction and sales also will be aided by what he termed “dramatic healing in credit conditions, with an expansion in bank lending late this year and early next year”.

He said the US Federal Reserve Board - the nation's central bank - likely will hold its key federal funds interest rate at its current record-low of 0% to 0.25% until mid-2011, which will help keep the nation’s mortgage loan rates low.

Mark Zandi, chief economist at Moody’s Analytics, also sees steady improvement ahead for the overall US economy, which in turn will support the housing recovery.

He forecasts GDP growth of 3% or more this year, 4% in 2011 and close to a 5% expansion in 2012. “By 2013, we should have recovered all of the some 8m jobs that were lost in the recession,” he said.

Zandi also expects the Fed to keep interest rates at their historic lows. “I don’t expect the Fed to raise interest rates this year, and I don’t think they will raise the rates until unemployment figures start to come down, which probably won’t happen much before mid-2011,” he said.

Both Varvares and Zandi conceded that the continuing glut of foreclosed homes on the market certainly complicates a recovery for new home construction.

But Varvares said the number of foreclosed homes on the market varies greatly in major metropolitan areas across the country and is most concentrated in fewer than a dozen states.

Those foreclosed properties chiefly will be reflected in housing prices, especially in those saturated states and cities, “but we can have a housing recovery while simultaneously working down that excess inventory”.

Zandi agreed that the flood of foreclosed homes will keep housing prices restrained, noting that by the first quarter this year there were 1m vacant homes on the US market, and some 15m current homeowners were in negative equity situations - their homes being worth less than their mortgage balance - and at risk of default and foreclosure.

He said he expects it will take two years for the market to work off that excess inventory, to the end of 2011 at least.

Beyond the US economy, both Zandi and Varvares suspect that the EU economy will weaken again, dragged back toward recession or even into a new downturn by the euro crisis involving Greece, Portugal and Spain.

Zandi holds that Europe will fall back into recession, although he thinks the fallout for the US economy in that event will be manageable. He noted that while Europe accounts for 20% of US export trade, US export business overall represents only 8% of US GDP.

Varvares does not see another European recession, although he thinks EU growth may slip to 1% or flat-line this year. In addition, he sees a potential positive for the US economy in a newly moribund Europe.

“When bad things happen in Europe, you get the flight to quality, and investment comes here,” he said.

The real problem confronting the US economy and the housing sector within it, though, is the country’s increasing annual deficits and the ever-growing national debt.

“We are on an unsustainable path with the federal deficit,” Varvares said. “It is so large that a solution must involve significant spending cuts and revenue increases, and it is a challenge that policymakers will have to address in 2011 or 2012 at the latest - and there will be pain all around.”

The US national debt was approaching $12,000bn by the end of the first quarter this year, equal to about 85% of the nation’s gross domestic production of some $14,000bn - the highest ratio of debt to GDP since the US ran up a huge pile of debt during World War II.

Zandi agreed, warning that if the nation’s political and financial leaders do not deal with the debt crisis by 2012, “the nation’s economy will break because of interest rate increases that also will take housing out of the economy”.

If the debt load is not remedied, the housing sector could be seriously chilled by rising interest rates. But if the debt problem is addressed, that too could spell trouble for the home building industry.

“I think there will be a change in thinking among policymakers on both the spending and revenue sides,” Zandi said.

“On the spending side, there might be a change in entitlement programmes, perhaps with means-testing for Social Security and Medicare payments,” he said, meaning that retirees that are relatively well-off might be denied the Social Security retirement payments and federal Medicare healthcare benefits to which they otherwise would be entitled.

That could mean that hundreds of thousands of elderly couples would abandon plans to buy that nice little retirement cottage or condo.

“On the tax side, there might be some additional limitations on deductions - especially in home loan interest deductions,” he said.

Under longstanding policy, US homeowners can reduce their taxable income each year by the amount they spend in interest on their home mortgage loan - often a sizable reduction in their income tax obligation and a major incentive for home ownership.

If the mortgage interest deduction were to be eliminated or significantly limited, that alone could discourage many more thousands of households from making the jump from rental apartments to home ownership.

So, for the US housing sector over the next couple of years, things could be looking sort of okay. Maybe. Could be.

Or maybe not.

($1 = €0.82)

Paul Hodges studies key influencers shaping the chemical industry in Chemicals and the Economy
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By: Joe Kamalick
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