INSIGHT: US housing sector digs a deeper hole

17 March 2011 16:08  [Source: ICIS news]

US housing still trending downBy Joe Kamalick

WASHINGTON (ICIS)--Just when it looked like the US housing market could not get any worse, data on new home construction has burrowed right through the bottom, dispelling any hopes for even the beginning of a recovery.  

US home building fell off sharply in February, the Commerce Department said this week, with the number of housing starts down by 22.5% compared with January and off by nearly 21% from February last year.

In its monthly housing construction report, the department said that on a seasonally adjusted annual basis, work began on 479,000 single-family homes or apartment units last month - the second-lowest pace on record, eclipsed only by the 477,000 housing starts recorded for April 2009.

Last month's numbers were far lower than the revised figure of 618,000 for January and well below the February 2010 mark of 605,000 units.

Within the overall housing starts data, the department’s figures show that February’s decline was most severe in multi-family apartment buildings, down by 47% from January.

In single-family home construction - considered the core of the housing industry - the fall-off was also sharp, down by nearly 12%.

To put the current level of housing starts in perspective, the US, with a population of nearly 310m, is now building fewer than 500,000 new housing units annually. In the 1960s, when the population was only 180m (less than 60% of the 2010 head count), the nation was building 1.2m to 1.6m new homes or apartment units each year.

Looking at the figures in another way, with a current population that is more than 70% larger than in 1960, the US is producing almost two-thirds fewer housing units than in 1960 - a remarkable, even breathtaking, decline.

David Crowe, chief economist at the National Association of Home Builders (NAHB), suggested that the housing industry - which historically has led the nation out of previous recessions - was now unlikely to recover unless and until the overall economy gathers real speed and returns to normal growth.

“We need to see several months of consistent improvement in economic factors, plus concrete signs that the flow of credit to housing is improving, in order for the industry to return to a steady recovery,” he said.

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, roofing materials 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 the production of component materials.

The Commerce Department report on February’s residential construction also indicated that there was not much prospect for near-term improvement in the housing sector, with the number of building permits issued last month down by 8.2% compared with January.

The department said that the number of building permits issued in February was 517,000 on a seasonally adjusted annual basis, down from January’s revised figure of 563,000, and fully 20.5% below the 650,000 building permits recorded for February 2010.

Building permits are issued by local governments when contractors are ready to break ground and begin construction of a residential structure, so monthly permitting data are seen as a real-time indicator of the housing sector’s near-term prospects.

“The decline in new construction and permits in February is the culmination of a great deal of nervousness that both builders and consumers are feeling right now,” said Bob Nielsen, NAHB chairman and a home builder in Reno, Nevada.

“In an already-fragile market where credit for building and buying homes remains extremely tight, additional concerns about energy costs, interest rates and other factors are contributing to an atmosphere in which many have adopted a very cautious stance,” he said, referring to both builders and prospective home buyers.

Among those additional concerns is the continuing slide in home values and prices, now at a level 34% below the peak seen during the housing boom years of 2003-2006.

With prices sliding, even credit-worthy prospective home buyers are holding back, fearing that if they buy now, their new home’s value will start to fall as soon as they sign the papers.

Alternatively, those consumers who want to buy a new house and can qualify for financing may want to wait for prices to fall further in hopes of getting a better deal.

In the meantime, as home values sink, more and more current homeowners find that they are under water on their mortgages, owing more to the bank than their property is worth. Many are simply walking away from their homes and the debt, rather than go through the foreclosure process.

As more foreclosed homes come onto the market and are unloaded by banks - when they can sell them - at heavily discounted prices, overall home values are driven lower still in what becomes a chain reaction of declining values, more defaults and foreclosures.

February’s bad news on housing starts came just a day after NAHB member companies reported a very slight improvement in builder expectations.

The association’s monthly housing market index (HMI) rose to 17 in March, after four straight months at 16.

But that narrow improvement in builders’ expectations only looks positive in relation to the all-time low score of 8 in January 2009.

When set against the HMI’s full scale of 100 - and general scores in the 40s, 50s and 60s since the index was launched in 1985 - a reading of 17 shows just how deep the housing hole remains.

Citing the index, Crowe said: “While our latest member surveys showed a slight uptick in expectations for the future, there are just too many uncertainties out there for most builders and buyers to comfortably move forward with a new home project at this time."

Not at this time, and perhaps not for some considerable time to come.

 ($1 = €0.72)

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

By: Joe Kamalick
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