INSIGHT: Improving economy, rising prices could chill housing

21 February 2013 16:15  [Source: ICIS news]

By Joe Kamalick

US housing sector could be chilled by rising pricesWASHINGTON (ICIS)--After a years-long depression, the US housing sector finally appears to be well into a more-or-less steady if bumpy recovery – but oddly enough the improving national economy could well chill the home building rebound.

US new home construction fell by 8.5% in January from December, the Commerce Department said this week. Existing home sales were down in December and only barely improved in January, and pending residential contracts also fell in December.

To be sure, the current pace of home building is poised to pull well ahead of 2012, the year in which the housing sector finally began to climb out of its recession hole.

For example, the department said that housing construction in January was 23.6% ahead of January 2012.

So the US housing sector is seen to be in recovery, but progress has been uneven and marred by occasional monthly drops in one market measure or another.

And housing contractors are worried.

Market confidence among US home builders edged lower in February, a key survey said this week. The National Association of Home Builders (NAHB) said that its housing market index (HMI) fell by a single point this month to a reading of 46.

The HMI is a compilation of three subsidiary measures: home builders’ current sales of single-family homes; the number of prospective home buyers visiting model homes; and contractors’ expectations for home sales over the next six months.

On the 1-100 HMI scale, a reading of 50 or above indicates that home builders are confident about their prospects over the next six months.

During the US housing boom years of 2002-2005, the housing market index had held steady in the mid-60s, and even reached the upper-70s at times.

At the bottom of the US 2008-2009 recession, the HMI hit an all-time low of 8 in January 2009.

After bouncing around in the middle teens for the rest of 2009, 2010 and through most of 2011, the HMI measure of builder confidence began an apparent recovery in early 2012. The index rose into the upper-20s by midyear and then to the mid-40s by year end.

But now, NAHB said that home builders are troubled by continuing uncertainties over the nation’s still-high unemployment rate, tight credit and rising costs for materials and labour.

Earlier this month, the Labor Department reported that the nation’s unemployment rate edged back up to 7.9% in January from December’s reading of 7.8%.

That worries federal policymakers, such as Federal Reserve Board chairman Ben Bernanke, who has suggested that it may take years for the US to return to normal unemployment levels because businesses that survived the recession have cut staffs to bare minimums and replaced laid-off workers with more automation and greater efficiencies.  Bernanke has questioned whether many of those recession-tested, labour-lean and newly efficient comanies will ever fill job slots that were shed during the 2008-2009 downturn.

That could mean fewer workers able to buy a home, now and in the near-term future.

“Following solid gains over the past year, builder confidence has essentially levelled out and held in the same three-point range over the last four months,” said NAHB chairman Rick Judson.

“This is partly due to ongoing uncertainties about job growth and consumer access to mortgage credit,” Judson said.

“But it’s also a reflection of the fact that builders are now confronting rising costs for building materials and, in some markets, limited availability of labour and lots as demand for new homes strengthens,” he added.

The question is whether a gradually improving US economy could put the brakes on the still wobbly housing recovery by driving construction costs higher, even as banks continue to exclude many would-be home buyers from mortgage loans.

Pricing gains in construction materials have been nothing short of breathtaking, according to the Associated General Contractors of America (AGCA).

“Prices for construction materials moved higher in January,” the contractors group noted, “propelled by large jumps in items used in new housing and nonresidential building renovations.”

“Contractors had to contend with huge leaps in prices for gypsum, wallboard and lumber, as well as significant increases in the cost of insulation and architectural coatings such as paint,” said AGCA chief economist Ken Simonson.

“The producer price index for all construction inputs – what contractors pay for construction materials – rose 0.7% between December and January and is now up 1.3% compared to 12 months ago,” Simonson said.

Producer prices (also known as wholesale prices) for gypsum products such as wallboard and plaster soared 11.8% in January alone, AGCA said, and have seen a 20.4% increase over the last 12 months.

Lumber and plywood prices climbed 4.2% and 15.1% respectively, Simonson said, and insulation prices are up by as much as 5.4% while architectural coatings have seen price hikes of 1.1%.

AGCA pointed out that prices for fuel, paving and structural materials also have been rising, while costs for milled products made of copper, brass and aluminum are on the rise as well.

Consequently, home builders are facing increasing price hikes for raw materials and in general costs for doing business, but they’re not seeing a parallel advance in housing demand.

As long as unemployment rates remain high, even people with jobs are likely to remain uneasy about buying a new home. If your job security is in question, who would want to make a major investment in a home?

And for those would-be home buyers willing to take the plunge, mortgage criteria remain historically tight. Even two-income households with good credit ratings are being thwarted by what some consider extraordinary down-payment requirements.

But despite the narrow downturn in the February housing market index, NAHB chief economist David Crowe said he is confident the market would improve. 

“We expect home building to continue on a modest rising trajectory this year,” Crowe said.

The housing market is a key downstream consumer sector for the chemical industry, driving demand for a wide variety of chemicals, resins and derivative products such as plastic pipe, insulation, paints and coatings, adhesives, roofing materials and synthetic fibres, among many others.

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

By: Joe Kamalick
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