US housing to face continued headwinds, says Harvard study

26 June 2014 17:54 Source:ICIS News

WASHINGTON (ICIS)--The US housing industry will face continued headwinds in the near term, a key study by Harvard University said on Thursday, amid higher home prices and interest rates and shifting demographics that limit the number of home buyers.

In its annual analysis on “The State of the Nation’s Housing”, Harvard’s joint center for housing studies said that while the market for single-family homes seemed to develop a promising recovery in the first half of 2013, that recovery has not been well sustained.

“Higher mortgage interest rates were much to blame,” said the study.

“Once the Federal Reserve signalled its intent in mid-2013 to cut back on purchases of long-term bonds and mortgage-backed securities, interest rates rose sharply - corresponding closely with the timing of the housing market slowdown”, the analysis said.

Interest rates for a standard 30-year fixed-rate mortgage (FRM) rose from around 3.4% in early 2013 to more than 4.4% in early 2014.

Over the same period, said the study, the median price for a one-family home rose by 10%.

“As a result, the monthly payment for the median-priced home jumped by 23% in just one year,” the Harvard study noted, pricing many would-be buyers out of the market.

Higher purchase costs and interest rates are particularly discouraging to lower-income buyers who typically face even higher interest rates because they can afford to make only minimal down-payments.

“Another factor in the single-family slowdown is the pullback in investor purchases of distressed properties,” the analysis contends. With fewer foreclosures, “as the inventory of distressed homes now has shrunk and single-family house prices have risen, the opportunity for outsized returns in this market has diminished and investor demand has dropped”.

The Harvard analysts also cite changes in household formations and demographics in arguing that the nation’s housing industry may be facing a fundamental change.

The number of young people who should be setting out on their own, leaving home to rent an apartment or even buy a house, has dwindled disproportionately to population growth.

Since 2007, said the study, “some 2.1m more adults in their 20s and 300,000 more adults in their 30s lived with their parents in 2013 than if the shares living at home had remained at 2007 levels”.

In addition, among the young households that potentially would be home buyers in years ahead, said the study, an increasing share will be minorities with less financial ability to buy real estate.

“By 2025, minorities will make up 36% of all US households and 46% of those aged 25-34, thus accounting for nearly half of the typical first-time home buyer market,” according to Harvard.

Further, many would-be home buyers in that prime 25-34 age group are burdened by record levels of student debt, the study notes.

“Between 2001 and 2010, the share of households aged 25-34 with student loan debt soared from 26% to 39%, with the median amount rising from $10,000 to $15,000 in real terms.”

“Within this group, the share with at least $50,000 in student debt more than tripled from 5% to 16%,” the analysis noted, adding: “For these borrowers, the need to pay off these outsized loans likely will delay any move to homeownership.”

The housing market is a key downstream consumer sector for the chemicals 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 worth of chemicals and derivatives used in the structure or in production of component materials.

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

With shale gas dominating the headlines and ethane a major talking point in the petrochemical industry, ICIS editors in Houston are closely monitoring the situation. See the ICIS special report on shale, ethane and US ethane exports at

By Joe Kamalick