US firms build smaller homes to make them more affordable – Huntsman

SAN ANTONIO (ICIS)–US builders are reducing the sizes of single- and multifamily housing to make them more affordable as mortgage rates reach 20-year highs, an executive at Huntsman said.

US mortgage rates have been rising with the benchmark interest rate, which is set by the Federal Reserve. The US central bank could raise rates by one more quarter point from the current 5.25-5.50% as part of its campaign to bring inflation down to its target of 2%.

That campaign by the Fed has helped push average mortgage rates to 7.19%, a 20-year high, according to Freddie Mac, a company that buys and securitises home loans.

Those higher rates are one of the factors making housing unaffordable to a growing number of US consumers.

Home builders are responding by reducing the size of single-family houses by 10%, said Jan Buberl, Huntsman vice president polyurethanes Americas and global propylene oxide (PO)/methyl tertiary butyl ether (MTBE).

For multifamily housing, the reduction is 20%, he said.

MULTIFAMILY CONSTRUCTION
Buberl noted that many multifamily projects under construction were financed when interest rates were much lower.

It is unclear if similar projects would be viable under today’s much higher interest rate environment, he said.

POLYURETHANES AND CONSTRUCTION
Construction is important to Huntsman’s polyurethanes business because two-thirds of its sales in the Americas are tied to the sector, Buberl said. Out of that, 60% is tied to residential construction in the Americas and 40% is tied to commercial construction.

For residential construction, a lot of Huntsman’s polyurethane chemicals are used in insulation and oriented strand board (OSB).

For the chemical industry in general, housing is a key end-use market in the form of paints, wire insulation, house-wrap, sealants, roofing materials, resilient flooring, vinyl siding and many other chemical and plastic-related products. Other products include plastic pipe, insulation, paints and coatings, adhesives and synthetic fibres.

New housing also generates sales of appliances, furniture, carpet, fixtures and window treatments. In total, each start engenders on average over $13,000 worth of chemistry.

AFFORDABILITY CRISIS
In years past, consumers would have bought existing homes if they could not afford a new one. However, the US has a shortage of existing homes because of a drought in house construction that followed the 2008-2009 recession.

In addition, people who own homes are reluctant to sell them because their purchases were financed with relatively cheap loans, Buberl said. The average mortgage rate for current homeowners is 4%.

If consumers continue to hang on to their homes, they may choose to remodel and renovate, which would require polyurethanes and other plastics and chemicals used in construction.

IMPLICATIONS
Although housing is unaffordable for a large number of consumers, a significant share of them are at the age when people typically buy homes.

Those demographics, the shortage of housing and the smaller size of new homes could encourage more construction and sales even as mortgage rates remain high.

For multifamily housing, higher interest rates could make it more difficult to arrange the financing for future projects. Developers could try to offset those financing pressures by building smaller projects.

CURRENT SNAPSHOT OF COMMERCIAL CONSTRUCTION
Buberl noted that office construction is in a difficult situation because of vacancies caused by people working from home.

Warehouse construction has just come off of a wave of activity. It is close to equilibrium, with room for some additional growth.

Companies are building a lot of industrial plants closer to their customers in a phenomenon known as reshoring or nearshoring, Buberl said.

These types of industrial projects have flat roofs that require insulation. Walls also require insulation.

Roofs and concrete floors require coatings.

The Polyurethanes Technical Conference is held by the Center for the Polyurethanes Industry (CPI). It continues on Tuesday and runs through Wednesday.

Interview article by Al Greenwood

Thumbnail shows a home being built. Image by the National Association of Home Builders (NAHB).

(recast with dateline as San Antonio instead of Houston)