INSIGHT: US housing sector may take many years to recover

10 March 2011 16:30  [Source: ICIS news]

By Joe Kamalick

WASHINGTON (ICIS)--The long-depressed US housing sector may take several years to return to normal, with new home construction perhaps facing an even longer road to recovery, according to testimony presented in the Senate this week.

The Senate Committee on Banking, Housing and Urban Affairs asked a variety of construction, real estate and academic authorities to offer their views on the status of the US housing sector - and their collective outlook is grim.

Although there have been some recent and modest improvements, the housing sector remains heavily burdened by a huge inventory of unsold existing homes, low prices, would-be home buyers too scared or too poor to borrow, and tough lending practices that are making it difficult even for credit-worthy consumers to get mortgage loans and for builders to obtain development funding.

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 (€11,520) worth of chemicals and derivatives used in the structure or in production of component materials.

Susan Wachter, a professor of real estate and finance at the Wharton School at the University of Pennsylvania, told the committee that “housing markets for single-family homes are fragile”, with home prices fully 34% below peak values seen during the housing boom of 2003-2006.

“Looking ahead, the size of the current inventory of unsold homes and the so-called ‘shadow’ inventory will likely depress the price of homes further before they stabilise,” she said.

The inventory of unsold homes is comprised of residences whose owners or builders have put them on the market for sale. The shadow inventory is those homes whose current owners want to sell but don’t put their properties on the market because they couldn’t sell at a price that would cover their mortgage debt.

Wachter said that industry estimates “predict that housing prices will fall 5% to 10% more this year”.

Ordinarily, the current historic low prices for residential properties should encourage home buyers and boost sales. Not so, not now.

“The expectation of continued price declines will in itself deter home buying,” Wachter said. 

Prospective buyers worry that if they buy now, within months the value of their home could decline to a point where they owe more on the mortgage than the property is worth. Alternatively, would-be home buyers are holding back, anticipating that housing prices will continue to decline and they could get a better deal in a couple of months - or next year.

“Thus, the most pressing issue in the housing market today is how and when the excess inventory of homes will be cleared,” she added.

The flood of foreclosed homes on the market - what the real estate industry terms “distressed properties” - and that shadow inventory of homes whose owners want to dump them, means that a housing recovery could take a very long time.

Wachter said that there are approximately 4m homes in the foreclosure pipeline, including 2m that are already in the process of being taken back by banks, and another 2m homes whose owners are in default on their mortgages and soon will be in foreclosure.

Those 4m distressed properties do not include the shadow inventory, which could include millions more homes.

The National Association of Realtors (NAR) estimates that the housing market collapse has put as many as 11m US homeowners in “underwater” situations, meaning that they owe more on their mortgages than the properties are worth.

Those 11m underwater homeowners are not necessarily in default or at risk for foreclosure, but a perhaps substantial number of them make up the shadow inventory.

Uncertainty surrounding the inventory overhang is “the big threat facing the housing market”, Wachter said. “The glut of foreclosed and delinquent homes currently sitting on the market could take years to work through.”

In a normal economy, the current inventory of unsold homes on the market could be absorbed within two or three years, she told the Senate panel. But with the US economy still struggling to recover, and with consumers still worried about job security, it could take several years longer to work down that oversupply of homes.

That huge inventory and the unknown shadow inventory of homeowners who want to sell might even precipitate a new downturn in the housing market, she said, a double-dip housing recession.

“Thus pending foreclosures and potential future foreclosures from the shadow supply weigh heavily on the housing market,” Wachter said. “This potential additional supply of unsold homes suppresses home prices today and adds to uncertainty in the future.”

It could get worse.

“If the share of distressed sales rises, housing prices will fall further,” she warned, possibly causing “a re-entry into a vicious cycle of house price declines that could push more homeowners underwater, precipitating more defaults, which will drive prices lower again”, and so on.

“I’m not predicting this,” Wachter said, “but it is a possible outcome.”

The National Association of Home Builders (NAHB) was equally grim in its outlook and testimony before the Senate committee.

“The road to a robust recovery for housing remains a long and difficult path,” the trade group said.

“High unemployment, housing policy uncertainty in terms of buyer and builder finance, and long-term fiscal issues are challenges for the housing construction sector,” the association said.

NAHB urged Congress to move quickly on outstanding policy matters and uncertainties that are scaring off would-be home buyers.

The home builders said they need “definite solutions regarding the future of the government sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, that ensure a functioning housing finance system that provides credit to homebuyers on reasonable terms”. 

Fannie Mae and Freddie Mac (their colloquial names) are secondary mortgage market entities chartered by Congress to add liquidity to the housing finance market. It was those entities that were largely responsible for the housing bubble by authorising and encouraging Main Street mortgage lenders to issue sub-prime loans to home buyers who really could not afford them.

Congress must decide whether Fannie Mae and Freddie Mac - purchased by taxpayers when the bubble burst - should be shut down, revived or restructured.

NAHB said the housing market and new home construction are also chilled by talk among members of Congress and other federal policymakers about eliminating the longstanding tax deduction for home mortgage interest costs.

That deduction, which for some mortgage holders can take $10,000 or more off their annual tax liability year after year, is a major incentive for home purchases. If Congress were to revoke that deduction - in order to increase federal tax revenues toward balancing the budget - it would essentially mean higher and perhaps deal-killing costs for potential home buyers.

In particular, NAHB urged Congress to take steps to “unblock obstacles to acquisition, development and construction (AD&C) lending for builders”. AD&C loans make it possible for builders and residential project developers to buy acreage, put in streets, sewers and utility lines and begin building new homes.

Like Wachter, the home builders warned that a double-dip housing recession is a real possibility.

“The housing market faces a strong possibility of a double-dip [recession] characterised by strong price declines and significant declines in sales volumes if homebuyers do not have reasonable access to credit,” the builders said.

“It is clear that congressional action is needed to help open the flow of credit to home builders,” the association added.

“Without such action, there can be no housing recovery, which has major implications for our nation’s ability to recover from the economic downturn.”

($1 = €0.72)

Paul Hodges studies key influencers shaping the chemical industry in Chemicals and the Economy

By: Joe Kamalick
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