INSIGHT: US housing sector may be depressed through this decade

25 August 2011 17:33  [Source: ICIS news]

US housing faces new wave of foreclosures, price declinesBy Joe Kamalick

WASHINGTON (ICIS)--The US housing sector may take many more years to recover than previously thought, with growth in new construction lacking, flat or moribund well into the last half of this decade.

That gloomy housing market portrait is sketched by a series of dark brush strokes of data in recent weeks, drawn from housing reports and general economic expectations.

Most recently, US sales of new single-family homes fell by 0.7% in July from June, the third consecutive month of declines and further indication that the housing sector engine remains stuck on idle.

Although marginal, the 0.7% decline in July follows the 1% fall in June and a 2.1% drop in May.

And while the new home sales data provided by the Commerce Department are seasonally adjusted, those three months – May, June and July – are the peak US home-buying season when families typically rush to get a first home or trade up to a bigger dwelling before the kids start school in late August and early September.

For new home sales to be in decline for that peak period is especially telling.

Housing starts also declined in July, falling by 1.5% overall, including a nearly 5% drop in new construction for the core single-family homes sector.

Existing home sales fell 3.5% in July and were more than 13% below the most recent high point – relatively speaking – in January this year.

These depressing home construction and housing sales data figures come despite what Standard & Poor’s (S&P) said were new record lows for home prices and near-record lows for mortgage loan interest rates.

Not surprisingly, there was renewed pessimism among US home builders in August, with a survey showing that they don’t expect any improvement in new home sales in the next six months.

The housing market index (HMI), a measure of contractors’ confidence in the residential construction market, has been at or near all-time lows for four straight years.

Bob Nielsen, chairman of the National Association of Home Builders (NAHB), said that the three-month decline in new home sales reflects the fact that “home builders are still competing with large numbers of foreclosed and distressed homes on the market and a climate of uncertainty in which consumers are reluctant to go forward with a major purchase for fear of what economic news tomorrow might bring”.

And NAHB chief economist David Crowe said he doesn’t expect anything more than occasional and marginal gains in new home sales until next year. Longer term, he said, “we do not foresee any major advances until economic growth helps boost home buyers’ confidence”.

On that score, the housing sector and its supplier industries, including chemicals and plastics producers, might have to wait a considerable time.

Earlier this month, the Federal Reserve Board took the unprecedented step of guaranteeing that it would not raise its record-low 0%-0.25% interest rate for two years.

That move was intended to provide some measure of certainty for business planning and to encourage bank lending - but it also signaled that the US central bank doesn’t expect the nation’s economy to improve much at all before mid-2013.

This week the nonpartisan Congressional Budget Office (CBO) said that the US unemployment rate, now at 9.1%, likely would remain above 8% well into 2014. That is not likely to boost home-buyer confidence.

Persistent high unemployment also means that more home owners are at risk of losing their homes to foreclosure.

The Mortgage Bankers Association (MBA) reported this week that home loan delinquencies have increased for two consecutive quarters, reversing a downward trend that had begun in 2010.

“Mortgage delinquencies are no longer improving and are now showing some signs of worsening,” said Jay Brinkmann, MBA’s chief economist.

The up-tick in mortgage delinquencies was in part attributed to the nation’s persistent high unemployment level, including a record period of long-term joblessness. More and more long-term unemployed workers who have been trying to hang on to their homes are finally falling behind and now face foreclosures.

So a new wave of foreclosed homes could be hitting the market while the huge overhang of repossessed properties from the subprime mortgage collapse has yet to be absorbed.

That would put still more pressure on home values, generating what S&P described in its report as “a continuing downward spiral with no end in sight”.

As home values continue to decline, more home owners become under water on their mortgages, can’t sell their properties and might just walk away from the home and their loan obligation - leaving the empty house to the bank.

Little wonder that most US consumers now think that buying a home is a bad family investment, with a Rasmussen Reports survey showing that only 43% of American adults think owning a home is a good idea, compared with 73% before the recession.

For a growing number of US consumers, the American dream of home ownership has turned into a nightmare.

A downward spiral of home values can become self-perpetuating and further erode sales of both existing and new homes, which in turn drives housing values lower still, and so on.

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 or the year after.

Even prospective home buyers who meet increasingly stringent mortgage loan credit and down-payment requirements often are undone by the day-by-day freefall in home values.

Many home sale deals are falling apart, according to the National Association of Realtors (NAR), because the purchase price agreed between seller and a qualified buyer frequently turns out to be higher than the property’s appraised value, so the mortgage lender backs away from the deal.

NAR spokesman Walter Maloney said that 16% of the group’s real estate agents reported such collapsed deals over the last two months because appraised values came in below the price negotiated.

As unemployment continues high and home prices fall further, that trend is likely to accelerate.

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

By: Joe Kamalick
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