INSIGHT: High-volume US housing sector may be gone for ever

28 April 2011 18:06  [Source: ICIS news]

US housing market might never be the sameBy Joe Kamalick

WASHINGTON (ICIS)--The US home building industry is expected to recover from the housing bubble collapse and the recession that followed, but it might take three or four years - and the glory days of the 2003-2006 boom are likely gone for ever.

In addition, according to the latest housing sector outlook, the home building industry still faces challenges that could delay or slow a comeback.

David Crowe, chief economist at the National Association of Home Builders (NAHB), expects that a turnaround in new home demand and construction will emerge in the second half of this year and continue into 2012 and beyond.

But it will be a long, slow pull.

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 (€10,880) worth of chemicals and derivatives used in the structure or in production of component materials.

In NAHB’s semi-annual housing forecast and outlook, Crowe said that positive indicators include historically low home mortgage interest rates, now just under 5%, that he does not think will increase substantially before the end of 2012.

As home prices remain at very low levels - and indeed as residential prices continue to fall - housing affordability remains very favourable, he said.  He noted that 74% of recently sold homes were affordable for US families at the median income level.

Crowe contends that there is a large volume of pent-up housing demand among young adult populations in the 20-35 year-old range who could not buy a new or existing home during the recession and soon should be moving out of their parents’ homes and into the housing market.

“A 30-year-old living in mom’s basement is not a sustainable lifestyle, either for the young adult or the parent,” he said, “and we will see housing demand growth develop from that.”

When young adults leave their childhood homes, finish college or otherwise move into the workforce, those departures generate what demographers call “household formations”.  Those young adults typically would rent apartments or homes and eventually buy a residence, driving demand for multi-unit and single-family housing.

But because of the recession, that normal flow of household formations was blocked.

Crowe says that based on US population growth in recent years, there may be as many as 2m household formations that should have developed but could not, and that backed-up demand for housing must at some time break forth.

However, Crowe conceded that the data on household formations is uncertain, and he also has worries about factors that could impede a housing recovery.

He noted that home builders continue to face difficulty in getting project development loans, consumer confidence was still low, unemployment remains stubbornly high, and the ongoing flood of foreclosed properties for sale at sharply discounted prices discourages new home construction and sales.

Crowe said he was nonetheless confident that the housing sector would see continuing if slow improvement, with housing starts growing from a projected annual pace of around 471,000 units this year to perhaps 698,000 new homes in 2012.

That compares with annual housing starts that were near, at and even above 2m units from late 2003 through early 2006 before the bottom fell out with the sub-prime mortgage collapse and the broader US financial crisis beginning in 2008.

Longer term, he expects the market to return to a more or less normal level in later years, with an average annual pace of new home construction at 1.5m units - but never again to reach the 2m-plus annual rate seen in the boom years.

Mark Zandi, chief economist at Moody’s Analytics, told the NAHB outlook conference that he was not quite so optimistic.

He said he sees the foreclosure crisis continuing, and the ongoing cascade of foreclosed or short-sale homes onto the housing market could well drive prices still lower.

Indeed, earlier this week the Standard & Poors (S&P) home price index showed housing prices in decline in February for the seventh straight month, with S&P warning that the home construction industry was within “a hair’s breadth” of a double-dip recession.

Zandi cautioned that the real estate pricing decline could develop into a vicious, downward spiral. 

As home prices continue to fall, more and more homeowners become “under water” on their mortgage loans, meaning that they owe more on the note than the residence is worth. 

That in turn leads to more loan defaults and more foreclosed and short-sale homes being dumped onto the market, depressing property values still further, putting more owners under water, and so on and so on.

“As long as house prices are falling, it is a good reason to be nervous,” Zandi said.

At best, he thinks it will take 12-18 months for the flood of foreclosed residential properties to be worked through the market.

Zandi agrees that there is an unknown backlog in household formations, and those would-be home buyers will in time move into the market.

But he also anticipates two key societal and policy developments that potentially could change the US housing market for a generation or more.

“I think we have begun a long-running shift away from single-family home ownership to renting, in part because the single-family home as an investment has not done well in recent years,” he noted.

“Younger householders don’t think about a house as our parents did or as we did, as an asset that will inevitably appreciate,” he said, so many of the 20-30 year-olds who ordinarily might be prospective home buyers will not become owners.

Second, Zandi thinks that sooner or later there will be a shift in government policies on mortgage financing requirements and perhaps tax benefits for home ownership that will make home buying even less attractive as a personal investment.

Federal financial policies likely will require lenders to retain higher levels of capital, which will precipitate higher mortgage interest rates and higher qualification criteria for borrowers, including much higher down-payments - putting home ownership well beyond the reach of many who otherwise might be willing buyers.

The heyday of the US market for single-family home ownership may well be behind us.

 ($1 = €0.68)

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

By: Joe Kamalick
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