INSIGHT: US housing recovery a victim of its own success

01 November 2013 15:05  [Source: ICIS news]

US housing recovery threatened by its own successBy Joe Kamalick

WASHINGTON (ICIS)--The US housing recovery may be the victim of its own success, as rising home prices evidence increasing demand but more recently - and in combination with rising loan rates - have begun to turn away would-be buyers.

A key signal of trouble ahead for the housing recovery came this week with news that pending home sales had fallen in September for the fourth straight month.

National Association of Realtors (NAR) chief economist Lawrence Yun said that the four-month run of declining numbers in pending home sales “tells us to expect lower home sales for the fourth quarter, with a flat trend going into 2014”.

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.

However, pending sales can fall apart when the buyer cannot get a bank loan - an increasingly common occurrence as US mortgage loan rates continue to rise.

The association's pending sales index is seen as a reliable, forward-looking indicator for near-term expectations in the US housing sector.

Yun said that the continuing decline in pending home sales can be attributed chiefly to increasing mortgage loan interest rates and rising housing prices that together crowd some would-be home buyers out of the market.

“Declining housing affordability conditions are likely responsible for the bulk of reduced contract activity,” Yun said, but he also cited “a broader hit on consumer confidence from general uncertainty that also curbs major expenditures such as home purchases”.

Home-buying affordability, said Yun, has fallen to a five-year low “as home price increases have easily outpaced income growth”.

The national median price for an existing home in September this year was $199,200 (€147,408), the NAR noted, an 11.7% increase from the same month last year and the tenth consecutive month of double-digit increases in year-over-year figures.

Those gains have chilled sales of existing homes, the NAR said, with the pace of sales dropping by 2% in September from August.

Freddie Mac, the congressionally chartered secondary mortgage market, echoed Yun’s concerns in its own housing market report this week.

In its monthly assessment of the housing industry, Freddie Mac said that the 16-day partial federal government shutdown in mid-month probably discouraged some would-be home buyers. But more central to the cooling recovery were debt ceiling issues and slow growth in the underlying economy that together “are slowing the housing recovery heading into the fourth quarter of the year”.

Even as employment and other economic worries are rattling consumers, Freddie Mac noted too that steady increases in mortgage loan interest rates over the last year further discourage prospective home buyers.

“Expect mortgage rates to head higher into 2014,” the Freddie Mac analysis said.

Average US interest rates for a 30-year fixed-rate mortgage (FRM) bottomed out at 3.35% at the end of last year and have been inching up ever since.

The average 30-year fixed rate mortgage (FRM) in September was 4.49%, its highest level since July 2011 and a full point higher than the same month in 2012.

Frank Nothaft, chief economist at Freddie Mac, said that “We’re likely going to see the housing recovery slow down, but not shut down, as we close out the rest of this year”.

He cited tight housing inventories and “slumping consumer confidence” in addition to rising loan rates and home prices as driving the anticipated slowdown.

US home prices continued to climb in August from July, according to this week’s Standard & Poor’s (S&P) housing prices report, even though the rate of increase has been slowing as mortgage loan rates have been gaining.

In its monthly report, S&P said that average home prices across 20 major US metropolitan areas rose 1.3% in August from July and were nearly 13% higher than in the same month last year.

With the double-barreled blast of rising home prices and loan rates, there is little wonder that US home builders are becoming increasingly uneasy about the near-term future. 

US home builder confidence fell in October for the second straight month.

The housing sector is a key downstream consumer industry for a wide variety of chemicals, resins and derivative products, either in construction materials and end-use furnishings or in manufacturing component materials and furnishings.

($1 = €0.74)

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

By: Joe Kamalick
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