OUTLOOK ’12: Battered US housing market may stage recovery

27 December 2011 22:00  [Source: ICIS news]

By Joe Kamalick

It may be years before home building returns to normalWASHINGTON (ICIS)--US new home construction finally hit bottom in 2011 and is now poised to make a long, slow recovery beginning in 2012 – at least that is what people in the housing industry are hoping.

But they also thought 2009-2010 would be the absolute darkest point in the long night of the housing depression and that 2011 would bring the first hints of recovery's dawn.

In both cases, that was not to be.

“We thought that 2009 would stand as the lowest on record [for housing], but it appears that 2011 will establish a new bottom,” National Association of Home Builders (NAHB) chief economist David Crowe said.

US home construction will set a record low in 2011 before beginning a long road to recovery sometime in 2012 to reach a near normal pace possibly by the end of 2013, Crowe said at the association’s semi-annual outlook conference.

“New home and existing home sales will finally begin to pick up – but not soon,” he said.

He said he expected the housing market to remain flat for the next couple of quarters “before we start to see some recovery in 2012, led by some scattered markets around the country, and then get stronger into 2013”.

That forecast reflects a change in the association's market expectations in just six months. In the group’s semi-annual outlook in April, Crowe had forecast a turnaround in new home demand and construction in the second half of 2011.

That projected recovery now has been pushed back to around mid-2012 – but, even then, it is perhaps more prayer than prediction.

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 $15,000 (€11,550) worth of chemicals and derivatives used in the structure or in production of component materials.

“It will be a long road back to normal for single-family housing starts,” Crowe said. And the anticipated recovery will be spotty, doing better in some states than in others, before reaching a near-normal pace by the fourth quarter of 2013.

In normal economic times, the US would see new single-family homes built and sold at a pace of around 1m to 1.5m annually. During the housing boom years of 2004-2006, housing starts were running near, at and even above 2m units annually.

For much of 2011, US housing starts have been running in the range of 600,000 units, including both single-family homes and apartment units.

In the core market for construction of new single-family homes, US sales have been in the range of 300,000-325,000 units for much of 2011, a pace that Crowe describes as “just running at idle”.

Crowe said he expects the home building sector will begin to see some recovery in 2012 because the US economy is expected to show “slight but continuing improvement beginning in this fourth quarter and continuing into 2012 and on into 2013”.

In addition, he said a backlog of household formations should begin to flow into the housing construction market as the economy slowly picks up. 

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 the recession blocked that normal flow of household formations. As a result, Crowe contends that there is now a large volume of pent-up housing demand among 20-35-year-olds 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.”

Crowe said that, with normal population growth, as many as 2m household formations have been postponed during the recession. Once the economy shows better strength, those 30-somethings who have been living with their parents or sharing apartments will begin to move into the home-buying market.

Kevin Swift, chief economist at the American Chemistry Council, also said the housing industry is on the brink of renewed growth, although he too warns it will be a long, slow climb.

“The consensus is that housing starts in 2012 will move up a bit, perhaps close to 700,000 for the year, but that it won’t exceed 1m units until 2013 and then maybe 1.4m in 2014,” he said.

If housing starts return to normal in 2014, Swift said they would bring an end to what he called “a lost decade for housing”.

But, even if the pace of housing construction returns to near normal by mid-decade, the home-building industry still might not be as voracious a downstream market for chemicals and resins as it was before the crash. 

That is because many Americans, especially young adults, do not see buying a single-family home as a good or even safe investment. Many might be more inclined to rent, which could bring more improvement in the construction of multi-family apartment buildings at the expense of single-family homes.

Construction of a 100-unit apartment complex consumes fewer chemicals and resins than construction of 100 one-family homes.

Lawrence Sloan, president of the Society of Chemical Manufacturers and Affiliates (SOCMA), has similar hopes for a housing-industry recovery.

“I think the US housing industry will come back,” he said, citing historic low home prices and mortgage rates, along with pent-up demand.

Sloan said that, with US unemployment beginning to edge down, “consumers will begin to think that things are at least not going to get worse for the next couple of years, and those who are employed will feel more secure and think they’re not likely to be laid off”.

“With interest rates where they are, and with those rates likely to start edging up, I think people will take the plunge [and buy homes]," he said.

However, even if 30-somethings and others begin to move back into the housing market, there will not necessarily be a proportional increase in new housing starts because the market is awash with existing homes.

“There is a perfectly suitable alternative for new homes in existing homes,” Swift said.

And the availability of existing homes for sale at rock-bottom prices could continue to chill the market for new home construction.

Millions of US home owners are under water on their mortgages, owing more on their housing loans than their homes are worth. Many of those homes could go into foreclosure, dumping still more vacant houses on to the market.

If long-delayed household formations should begin to flow into the market, much of that demand will go to existing rather than new homes.

In addition, if demand picks up, the market improves and home prices begin to edge upwards, that in turn could trigger a new flood of properties from the so-called shadow inventory.

The shadow inventory consists of those homes whose owners want to sell but have not put their properties on the market because they could not sell at a price that would cover their mortgage debt.

No-one knows how many homes are in that shadow inventory but, if housing prices improve, more of those under-water owners will put their properties on the market, swelling still further the supply of existing homes for sale.

It could well be several years before new home construction returns to anything like normal.

($1 = €0.77)

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

By: Joe Kamalick
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