INSIGHT: US housing recovery may be running out of gas

28 March 2013 17:18  [Source: ICIS news]

US housing recovery stalled by credit woesBy Joe Kamalick

WASHINGTON (ICIS)--The long-awaited US housing recovery appeared to be taking hold, but now the once powerful economic engine of new home construction is spluttering and coughing, deprived of credit fuel and facing uphill materials and labour costs.

Many indicators have turned from promising to problematic as one key measure of housing sector health after another has faltered.

US sales of new single-family homes fell by 4.6% in February from January, the Commerce Department reported, yet another sign of an uneven and bumpy road in the housing recovery.

Sales of new one-family homes last month were at a seasonally adjusted annual pace of 411,000, down from the downwardly revised January figure of 431,000.

Sales of new one-family homes saw a 7.3% drop in December from November, followed by a sharp 15.6% advance in January, and now this key housing sector indicator has flipped over again with the 4.6% February decline.

US housing starts rose by 0.8% in February, clearly a positive sign.

But Lawrence Yun, chief economist at the National Association of Realtors (NAR), says that new home construction should be much stronger than that mere 0.8% gain.

In another sombre signal, US pending home sales edged lower in February from January, with the downturn blamed on a lack of available inventory that could further hamper a housing recovery.

NAR said that its pending home sales index (PHSI) fell by 0.4% in February from January, the third decline in the last four months. 

Three nose-dives in four months is not the stuff of recovery.

Looking on the bright side, NAR noted that the pending sales index is still 8.4% higher than the 96.6 reading seen in February last year, and the measure of near-term home sales has been running ahead of year-ago levels for 22 months.

A residential property sale is listed as “pending” when a contract has been signed but the transaction has not been closed and funded with a mortgage loan. A pending sale usually closes within a month or two of contract signing.

True, the housing sector is doing better than a year ago, but the question is whether the construction recovery can break free of its up-and-down pattern of gains and reverses and really take off.

Yun said that limited inventory and continuing tight credit requirements are holding back the housing market.

“Only new home construction can genuinely help relieve the inventory shortage,” he said, “and housing starts need to rise at least 50% from current levels.”

Yun noted that many housing contractors are small businesses that are having trouble getting construction loans.

As a consequence, he said that the nation’s low housing inventory is restraining what otherwise might be stronger growth.

“The volume of home sales appears to be levelling off with the constrained inventory conditions,” Yun said, “and the levelling of the index means little change is likely in the pace of sales over the next couple of months.”

February’s downturn in pending sales, while minor, comes in the wake of other discouraging housing news. 

Market confidence among US housing contractors declined in March for the second straight month as builders face a trio of challenges: the inability to get development loans, rising materials prices, and increasing costs for skilled labour – when those workers can be had at all.

Most troubling of all, though, are the tight credit conditions that make it all but impossible for many small-business contractors to get acquisition and development funds.

Rick Judson, chairman of the National Association of Home Builders (NAHB), said that the major impediment to the housing recovery is the dearth of development lending.

“In many housing markets demand is increasing,” Judson said, “and the supply of new homes remains near record lows.”

But, he said, “builders still cannot obtain construction loans because credit remains very tight in the aftermath of the housing downturn”.

The NAHB and other housing interests have appealed to Congress for credit relief.

A recently introduced House bill, HR-1255, would be “a substantial step forward in the effort to restore the flow of credit to the housing industry”, Judson said.

The legislation, titled the Home Construction Lending Regulatory Improvement Act, would direct banking regulators to ease up a bit.

It would require federal and state banking regulators “to ensure that federal and state chartered banks and thrifts that provide financing to America’s home builders are permitted to make loans, provide on-going liquidity, and ensure stable financing to such home builders”.

But the legislation essentially asks that regulators encourage the sort of lending behaviour that many see as the cause of the catastrophic US housing sector collapse.

“If any qualified financial institution is holding real estate loans in its lending portfolio that in the aggregate represent 100% or more of its total capital, the appropriate federal banking agency shall not prohibit any such institution from continuing to make such loans to home builders,” the bill provides.

And, “The appropriate federal banking agency shall not prevent a qualified financial institution from making a real estate loan to a home builder that has a viable project”, the bill also requires. 

Those two clauses seemingly would require a fairly subjective judgement call on the part of a regulator – who might imagine himself sweating in front of a congressional hearing some years later trying to explain why he authorised what turned out to be a rash of non-performing loans.

The bill has been referred to the House Committee on Financial Services, but its prospects likely are poor.  The housing and banking collapse is still too fresh in legislators’ minds to want to open the lending floodgates anew.

Even if contractors could get development loans to buy land and building materials, they might not be able to actually build, so acute is the labour shortage among workers skilled in the building trades.

NAHB chairman Judson, a home builder in Charlotte, North Carolina, says that the housing sector lost 1.4m skilled workers during the recession.  During that two-year downturn, many if not most of those workers got training for different skillsets and moved on to other industries.

They’re well settled in those other careers by now, Judson noted, “and they are not returning to the residential construction sector”.

That means that contractors are being obliged to pay top dollar for those skilled workers they can find – carpenters, excavators, framers, roofers, plumbers, bricklayers, electricians, etc.  The same is true for sub-contractors; the asking price for labour is going up across the board.

The combination of higher costs for building materials and labour means that contractors have to raise prices on the homes they build, and that can be a two-edged sword.

As home prices continue to climb, many would-be new home buyers may be priced out of the market.  Even though US mortgage loan rates remain near historic lows, lenders are demanding loan qualification and down-payment criteria that even two-earner households find difficult to meet.

On the plus side, rising real estate prices mean that some existing home owners who have been underwater on their mortgage – owing more to the bank than their home is worth – might now be able to sell the old homestead and perhaps buy a new house or a bigger existing home.

But, then again, those hopeful home-switching buyers could be thwarted by the still tough credit terms.

It is worth noting that the Mortgage Bankers Association (MBA) reports that home owners refinancing their current homes make up fully 75% of loan applications, which means of course that only 25% of applicants are seeking home purchase loans – not a good sign for new home construction. 

The American Chemistry Council (ACC) has detected the potential levelling of the new home construction market in data it collects for its monthly chemical activity barometer (CAB).

The council said this week that its CAB data suggest that growth in the housing construction market, already bumpy and uneven, might slow a bit further.

ACC chief economist Kevin Swift said that “While rising activity continues in construction-related coatings, pigments and plastic resins – supporting a continued recovery in the housing sector – we anticipate that recovery to begin a more slow progression”.

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

By: Joe Kamalick
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