FocusUS house market needs 2-3 years to work through supply glut

21 September 2011 00:08  [Source: ICIS news]

By Al Greenwood

HOUSTON (ICIS)--A huge backlog of foreclosures is one of the main factors holding back the US housing market, which will need two to three more years to work through the glut, an economist said on Tuesday.

The number of mortgages delinquent or in default stood at a seasonally adjusted 12.9% at the end of the second quarter, said Patrick Newport, an economist for IHS Global Insight. That high rate is holding back the housing market, which still has not recovered from a five-year downturn.

"The new-home market won't really recover until we get rid of the excess inventory caused by the distressed sales in the existing market," said Jim Gaines, research economist the Real Estate Center at Texas A&M University.

New housing is a key end-market for the chemical industry, driving demand for polyvinyl chloride (PVC); nylon for carpet fibre; flexible and rigid polyurethane foams; paints and coatings; titanium dioxide (TiO2) pigment; adhesives and sealants; and expandable polystyrene (EPS) for insulation.

The American Chemistry Council (ACC) estimates that each new home built represents some $16,000 (€11,680) worth of chemicals and derivatives used in the structure or in the production of component materials.

The latest housing statistics do not bode well for the industry.

Housing starts in the US fell to a seasonally adjusted annual rate of 571,000 units in August, down by 5% from the revised July estimate of 601,000, according to the US Department of Commerce.

August's figure was by far among the worst that the department has ever reported in more than half a century of statistics, where monthly starts typically exceeded an annual rate of 1m.

Moreover, August is well below the previous peak of 2.27m reach in January 2006.

"That market has just been stuck at the bottom for three years," Newport said. "There is absolutely no sign that the market is gaining any strength."

Mortgage applications to buy houses are at 16-year lows, he said. The US economy is weak.

"It is just not a good time to buy a home," he said.

The glut of foreclosures is holding back pricing, creating an environment where buyers expect prices will continue falling, he said. That, in turn, discourages people from buying homes.

A bank selling a foreclosed house sets a low price, since vacant properties are at a high risk of vandalism, he said. "It does not want to hold on to the home."

If the US falls into another recession, it would increase the amount of defaults and foreclosures, further delaying any recovery in the housing market, Newport said.

Foreclosures are not the only factor dragging down the housing market.

In July, the US had a 9.4-month supply of existing houses, according to the National Association of Realtors. Such a large inventory of houses discourages home builders from constructing new houses.

"They cannot make a profit," Newport said.

Meanwhile, US consumers are moving away from home ownership.

The rate was 65.9% in the second quarter, down from about 69% reached in the middle of the last decade, according to the US Census Bureau.

"People are discovering that renting is a viable option," Gaines said.

Some of this reflects demographic changes, he said. In the 1960s, 75% of households were married couples. Now, that figure is less than 50%.

"Obviously, people are having fewer kids and having them later in life," Gaines said.

Also, potential buyers cannot qualify for loans because of tighter credit, a far cry from the boom early in the last decade, Gaines said.

"The pendulum has swung from when all you had to do was fog a mirror to get a home loan to now, when you have to pledge your first and second born," he said.

The weak US economy, with its persistent high unemployment, is also hurting the housing industry.

Longer term, the US housing market is bound to recover because the nation's population continues to grow, at a rate of about 3m/year, Newport said.

"At some point, we are going to have to start building homes at a much faster rate," he said. "We can't continue at this slow pace."

Gaines said that the US typically needs about 1.5m new housing units each year.

For about two years, the rate of new construction has been about 500,000/year, according to the Census Bureau.

($1 = €0.73)

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

By: Al Greenwood
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