US housing sector may be heading for double-dip recession

31 August 2010 17:48  [Source: ICIS news]

WASHINGTON (ICIS)--The US housing industry may be headed for a new decline and a double-dip recession as existing home and new construction sales have turned sharply down amid “exceptional uncertainty” about a recovery, market specialists said on Tuesday.

Investment specialists and academic economists cautioned that while US home prices had shown some recovery in the second quarter ending in June, “other recent housing indicators point to more ominous signals as tax incentives have ended and foreclosures continue”.

Real estate market analysts and economists with Standard & Poors (S&P) credit rating agency, Yale University and Wellesley College told a press conference that with the April end of the federal tax credit stimulus for home buyers, housing data suggest that the sector could be poised for yet another major downturn.

Last week the housing industry reported a sharp decline in July for sales of existing homes, and the Commerce Department said that sales of new single-family residences fell to an all-time low that month.

The housing industry, especially new home construction, is a key downstream consuming sector for a broad range of chemicals and derivatives that are used in the manufacture of construction supplies or as end-use components in home and apartment structures.

The S&P/Case-Shiller home prices index issued on Tuesday showed that US average home prices rose by 4.4% in the second quarter after having declined by 2.8% in the first three months of this year.

But those second-quarter gains were attributed chiefly to the federal tax incentive that strongly influenced sales especially in April and even into May and June as sales related to the tax credit were concluded in those two months.

David Blitzer, chairman of S&P index operations, said that while second quarter numbers were upbeat, “other more recent data on home sales and mortgages point to fewer gains ahead”.

Robert Shiller, Yale economics professor and chief economist at MacroMarkets, said that the “striking, catastrophic decline in the volumes of home sales that began after the peak in 2005 ended in 2009” with the beginning of the federal tax credit incentive for home buyers.

“But now it is down again,” he said of home sales since the incentive ended.

“This is an exceptionally uncertain time,” Shiller said, adding that “with the tax credit gone, housing prices could go down again.”

Karl Case, economics professor at Wellesley and founding partner in Fiserv, Case, Shiller, Weiss, Inc., noted that US housing starts - the construction of new homes - is at a 50-year low and housing affordability “is the best we’ve ever had with home prices down by 30% and interest rates exceptionally low”.

But despite that record level of home affordability, people were not buying.

“The thing that is troubling me is demographics,” Case said.

“We should be seeing household formations in the range of 1m to 1.5m annually,” he said. Household formations occur when young people leave home, graduate from college and enter the workforce, rent apartments or get married and buy a home.

“But I’m worried that we are going to have fewer household formations this year than we think we have,” Case said, adding that detailed data would not be known until the results of the just-concluded 2010 US census are available.

“Kids are staying home, others are doubling up, we’re not getting as many immigrants as before, and more people are leaving,” Case said, “and that equals housing vacancy rates staying very high.”

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