INSIGHT: US housing sector facing a new setback

22 September 2011 17:43  [Source: ICIS news]

By Joe Kamalick

WASHINGTON (ICIS)--The long-struggling US housing industry could be facing yet another setback within days unless Congress moves quickly to extend federally approved loan limits.

When the US government’s fiscal year ends on 30 September, existing federal home loan guarantees will also expire, according to the National Association of Home Builders (NAHB).

These existing loan guarantees allow home loans of as much as $729,750 (€532,718) to be acquired by Fannie Mae and Freddie Mac, the two congressionally chartered secondary mortgage market entities.

As long as Freddie and Fannie will accept loans of that level, local banks across the country – banks that originate most home purchase loans – know they can sell those notes to Fannie and Freddie, freeing up their capital to make other home loans.

However, if the current federal ceiling for residential property loans should expire next week without a congressional extension, the maximum loan level will shrink from $729,750 to $625,500, the level established for high-cost areas under the Housing and Economic Recovery Act of 2008.

That is a difference of only $104,250, but the builders group warns that it could have a broadly chilling impact on the already problematic home mortgage market.

A single-family home in the price range of $625,000 to $730,000 would seem to many to be a fairly high-end property. 

But in many of the nation’s major metropolitan areas, a family looking for a three- or four-bedroom home within a one-hour commute of any major city – such as Boston, Washington DC, Chicago, San Francisco and Los Angeles – would be lucky to find a house in that $700,000 price range.

If the federal guarantee ceiling is allowed to default back to the earlier $625,500 level, it could further smother the housing market, the builders group said.

The housing sector is a key downstream consumer sector for the chemistry 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 $15,000 (€10,950) worth of chemicals and derivatives used in the structure or in the production of component materials.

The long decline of the US housing market has had a negative impact on the country’s chemicals and resins producers and also on other manufacturing sectors.

NAHB chairman Bob Nielsen warned this week that “a drop in mortgage loan limits would reduce housing demand and place downward pressure on home prices in major markets”, including some areas that are now just beginning to show signs of possible recovery.

A lower ceiling for Freddie and Fannie loan acquisitions would in turn have local banks, the loan initiators, backing away from any prospective mortgage that exceeds the lower loan level.

“This would exacerbate the current housing downturn, trigger more foreclosures, impede job growth and endanger the fragile US economic recovery,” Nielsen warned.

Prospective home buyers seeking a mortgage just a bit higher than the lower federal ceiling would be obliged to meet tougher loan criteria, including higher interest rates, more stringent credit standards, and higher fees and down-payment levels.

“Credit conditions for home builders and home buyers are already extremely tight,” Nielsen added. “Reducing the loan limits would further restrict overall mortgage liquidity and make it even more difficult for potential buyers to purchase a home.”

A further tightening of the mortgage loan screws would come at a crucial point for the US housing sector.

The home building industry and residential real estate in general have been taking a series of body blows of late.

The already-depressed homes sector saw a third monthly decline in new single-family home sales in July – a time when US home sales should be experiencing their seasonal upturn.

Pending home sales also fell in July, offsetting earlier gains, and new US home construction nosedived by 5% in August, falling nearly 6% below the home-building pace seen in the same period of the equally depressed 2010 market.

However, in a surprising and welcome turn, sales of existing US homes jumped by 7.7% in August from July, pretty much the first good news for the housing industry so far this year.

NAHB chief economist Lawrence Yun attributed the August rise in existing home sales to the historic affordability rates, with home prices low, especially for foreclosed properties, and mortgage interest rates at their lowest point in more than 50 years.

However, the housing market has seen occasional glimmers of recovery over the past couple of years, only to sputter and crash again.

The August upturn in existing home sales could be fleeting.

Consumer confidence remains very weak amid continuing high unemployment – zero US net job growth in August, a first since 1945 – growth in US manufacturing nearing the stall point, and a looming European financial crisis that could wash up on US shores.

So a cutback in the federal loan guarantee ceiling for mortgages could land a knockout punch on the housing sector just as it appeared ready to lift its head.

There is legislation pending in Congress to extend the current, higher loan level guarantee, but time is short and the House and Senate are awash with bigger fish to fry.

($1 = €0.73)

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

By: Joe Kamalick
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