INSIGHT: US housing sector improves, but clouds threaten

22 August 2013 16:24  [Source: ICIS news]

By Joe Kamalick

US housing sector faces a demographic challengeWASHINGTON (ICIS)--The US housing market recovery continues to post impressive and reassuring numbers - but some doubts cloud hopes for a return to a normal, pre-recession pace of new home building and sales.

There is again talk that the US housing sector - since World War II one of the principal engines of the nation’s economy and middle-class growth - will never be the same as in those halcyon days of 1946-2006.

At first glance, the US housing industry has gained increasing strength over the last year and more.

US residential contractors have been gaining more confidence recently, with the National Association of Home Builders (NAHB) housing market index (HMI) rising to 59 in August and showing gains for four straight months.

The index reads 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 index had held steady in the mid-60s and even topped 70 at times.

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

Also in July, new home construction shot up by 5.9%, a strong showing.

But behind the overall gain in housing starts last month there were some worrisome figures. Most of the gain in new construction was for multi-unit apartment buildings, with an increase there of more than 25%, while work on the core market for single-family homes fell by more than 2% from the prior month.

And this month, more apparent good news: Sales of existing homes shot up by 6.5% compared with July, and monthly sales of pre-owned housing have been running well ahead of year-earlier figures for 25 straight months.

Here too, however, the National Association of Realtors (NAR) expressed worries that rising home prices and increasing mortgage interest rates could pose a challenge to the recovery.

NAR chief economist Lawrence Yun noted that “changes in affordability are impacting the market”, a reference to improving home prices and increasing mortgage loan rates.

“Mortgage interest rates are at the highest level in two years, pushing some buyers off the side-lines,” Yun said.

As home loan interest rates began to edge upward in the last year, some buyers rushed to make a purchase, thinking that rates might be higher later if they waited. That run of buyers helped boost the housing recovery, Yun said.

However, he added, “further rate increases will diminish the pool of eligible buyers”.

The rate for a conventional, 30-year, fixed-rate mortgage (FRM) rose to 4.58% in August from 4.37% in July. And July had show nearly a third of a point gain from June's 4.07%, quite a strong one-month advance. 

In July 2012, the 30-year FRM rate was 3.55%, so the cost of borrowing for a home loan has gained a percentage point in 13 months.

On top of higher loan costs, the recovery itself has helped boost housing costs, with the median price for a home in July nearly 14% higher than a year earlier.

This may concern chemicals producers, because the housing market is a key downstream consumer sector for the broad process 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 (€11,250) worth of chemicals and derivatives used in the structure or in production of component materials.

Underlying the sometimes halting home building recovery is the question of household formation and consumer confidence in the housing market.

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.

Data indicate that 1m to 2m household formations have been postponed over the course of the recent Great Recession, and as the economy shows better strength, those 20-somethings and 30-somethings that have been living with their parents or sharing apartments ordinarily would begin to move into the home-buying market.

But there are other data indicating that young workers no longer see home ownership as a good or even safe family investment. And as their baby-boomer parents move into retirement - and into multiple occupancy retirement homes - the flood of pent-up housing demand that builders and real estate agents have been hoping for might not develop, at least as not to the extent they might wish.

For many in Generation Y, also known as the Millennial Generation or those born in the late 1980s to the early 2000s and who are now in the 25-34-year age group, buying a home is a less desirable or affordable option than it was for their parents and grandparents.

The recent history of the US housing market does not inspire confidence, with years of foreclosures during and following the recession and with many of those who avoided foreclosure still under water on their home loans, owing more than the property is worth.

While the US employment market is slowly improving, it is far from healthy or encouraging. Millions of people have simply given up looking for work, and a freshly minted bachelor’s degree is no guarantee of employment - even at McDonald’s.

Jed Smith, managing director for quantitative research at NAR, says that younger millennials in particular are struggling just to keep their financial heads above water and many of them are not likely to be prospective home buyers anytime soon.

“Younger millennials are in a rough spot,” Smith said, “because in the last few years college costs have gone through the roof, so the younger millennials have more debt, on average about $28,000 [€21,000], with some higher and some lower.”

If they have a job, the millennials have to have a car to get to work. So, says Smith, it is as if many millennials have to make two car payments each month - their actual car payment and very likely a similar payment to cover their student loan obligations.

After food, housing and other essentials, that does not leave anything for a mortgage payment, to say the least.

Older millennials, those nearer to age 34, are a bit better off, simply because they had less student debt to begin with and have had time to work the loans down some.

That said, “right now millennials are buying homes at a pace slightly less than their representation in the population”, Smith said, a condition that likely will persist for some years.

“The level of student debt will force them to live more economically and to delay their major purchases,” Smith said.  “That could delay the housing market over the next three years or so.”

Smith believes that pent-up household formations and related housing demand will continue to drive a moderate housing recovery for the next 16-18 months, but when that wave crests and subsides, demand could well level off as the debt-burdened young millennials avoid home ownership.

Even so, Smith thinks the wobbly housing recovery is sustainable.

“Interest rates are not a problem,” he said. “We’re not going to see 6% mortgage interest rates in the next 18 months, and risk aversion is slowly beginning to ease among lenders,” meaning that home loans might be more available to young families.

In addition, he said, there is jobs growth now in the US. It is not spectacular and barely more than enough to accommodate young people entering the workforce, but the economy is “generating more jobs, not fewer”.

“I always say that there are three things that drive the housing market: jobs, jobs and jobs,” he said.

All this, said Smith, “makes for a sustainable recovery in the housing market”.

($1 = €0.75)

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

By: Joe Kamalick
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