INSIGHT: US housing sector is hammered but will recover

26 August 2010 20:11  [Source: ICIS news]

Economists see keys to a US housing recoveryBy Joe Kamalick

WASHINGTON (ICIS)--Most of the construction sounds heard in the US home building industry these days are really just the steady hammering of bad, worse and just plain awful economic news about the housing sector - but economists still expect a recovery.

The trip-hammer blows of bad news have been banging steadily since April when the year-long federal stimulus plan for the housing sector expired.

When that $8,000 (€6,320) tax credit for home buyers ended, the real dearth of housing demand began to show.

US new home sales fell off a cliff in May, plunging by nearly 33% compared with April.

Housing starts took a 10% nose-dive in May and then fell by 5% in June.

Existing home sales edged down in May and fell by 5% in June, while pending home sales plummeted 30% in May and continued to decline in the following month.

Not surprisingly, market confidence among US home builders took a dive as well, with housing contractors reporting in early August the lowest level of growth expectations in 17 months.

And that was before the wheels came off the housing bus this week.

On Tuesday, the real estate industry reported that existing home sales had fallen by more than 27% in July from June. And the inventory glut of unsold existing homes rose to a 12-month supply at current sales rates.

On Wednesday the Commerce Department said that sales of new single-family homes had tumbled by more than 12% in July - falling to the lowest level ever recorded since the data series began in 1963.

And the July inventory of unsold new homes shot up to a nine-month supply.

All of this is also bad news for US producers of chemicals.

The housing market is a key downstream consumer sector for the chemicals industry, driving demand for a wide variety of chemicals, resins and derivative 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 directly in the structure or in production of component materials.

The sale of existing homes also generates consumption demand for a broad range of chemicals and resins. New owners of a previously occupied house often paint the interior, replace carpeting and drapes, buy new furniture, fixtures and appliances - all of which require chemistry either in the manufacturing process or as end-product components.

So dark clouds in the housing industry also threaten chemical makers.

And the housing market crisis might well be even worse than the government and private real estate industry data indicate.

In addition to the glut of new and existing homes already flooding the market and driving prices down, there is what economists call a shadow inventory.

There could be another 2m or even 3m residences whose owners want to sell but are not putting the family home, vacation cottage or investment condominium on the market because they’re under water on the mortgage - owing more to the bank than the property is now worth - or because they simply want to wait for prices to recover.

When a housing recovery does develop and home prices begin to rise, much of that shadow inventory will likely flood into the for-sale category, perhaps putting new downward pressure on a nascent turnaround.

But, despite all the bad news and the gloomy outlook, economists in the housing industry and outside it hold that a recovery is coming, although it will be slow in building.

“The housing sector certainly is in a lot of trouble,” said Martha Gilchrist Moore, the ACC’s senior director of policy analysis and economics.

“Normally, at this stage of a general recovery from recession, and with interest rates and home prices at historic lows, you’d see consumers take off in the housing area and drive it forward,” Moore said.

“But consumers are tapped out,” she said, adding: “Unemployment remains high, credit is tight, and consumers, even those with jobs, are insecure.”

“There are a lot of constraints facing people who otherwise might be willing to buy a home. With housing prices down, they can’t sell the home they’re in, so they can’t move to take a job that might be available in another part of the country. It’s Catch-22,” she said.

Moore sees another "Catch-22" element - the term coined by novelist Joseph Heller and meaning a combination of conditions that seemingly defy resolution - in the relationship between the nation’s continuing high unemployment figures and hopes for a housing recovery.

“Employment needs to improve before you’ll see any sustained recovery in housing,” she said. “But again it’s a Catch-22 situation where a lot of jobs are tied to home and commercial construction, and jobs in service industries and manufacturing that feed into housing, such as mortgage banking, insurance companies, producers of draperies, plumbing fixtures and furniture.” 

“All of these areas have been depressed, and people working in those industries who might want to buy or sell a house are constrained,” she said.

But there is a silver lining of sorts, Moore said.

“This is likely the bottom,” she said. It can’t get any worse, so it’s bound to get better.

There won’t be anything suggesting a turnaround in the housing sector before the end of this year, Moore said, in part because the $8,000 tax incentive that was available in the first part of the year pulled home buyers into the first quarter who otherwise might have bought later in the year.

“But it will certainly improve in 2011,” Moore said.

“New households are being formed, people graduate from school, get married, there is still some limited immigration,” she noted. “These people eventually will be buying homes and in time they will absorb the excess inventory - although it will likely take some time to get back to a balanced position.”

A highly respected housing industry economist, Bernard Markstein of the National Association of Home Builders (NAHB), concedes that the sector looks bleak right now, but, like Moore, he sees a turnaround coming.

“This is all about jobs, jobs, jobs,” Markstein said. “The employment picture is poor, and even if you have a job you don’t rush out and buy a house if you’re not sure what your employment future is.”

Historically, the US housing industry has led the nation’s economy out of previous recessions. “But, clearly, that is not happening this time,” Markstein said. “We’re seeing a role reversal here; this time the general economy will have to pull housing out of its recession.”

Markstein notes that the number of new jobs being generated by the private sector has been improving over the last six months, not as fast as everyone would like, but it is gaining. He expects the employment picture will improve faster next year, and that in turn will rekindle housing.

Like Moore, Markstein notes that there is a lot of pent-up demand waiting on the sidelines against the day when housing prices become steady and lending improves.

This week’s Commerce Department report on the sharp decline in new home sales also said that there are about 210,000 newly built but unsold homes on the US market.

“That 210,000 homes inventory matches that of 1968,” Markstein said. “But in the four decades since then there has been a 90% increase in the number of US households.”

Young people are still living at home with their parents, and others are doubling-up in owned homes or rental units. As employment prospects improve, those potential home buyers will move into the market, Markstein said.

How long will it take?

“I think that by 2013 we will see the housing market back to some sense of normalcy,” Markstein said. “By the end of 2012 we’ll be getting there.”

Right now the US is seeing about 276,000 annual sales of new single-family homes - the core of the housing industry. In normal times, there should be something like 1m-1.2m new homes being built and sold each year.

It will be a long, slow climb back to that level, but both Moore and Markstein think we’ll get there.

($1 = €0.79)

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By: Joe Kamalick
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