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June 2012
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Housing Faces Slow, Uneven Recovery

Don’t expect a big turnaround in residential construction—and its associated increase in metal consumption—anytime soon, say the experts.

Mirroring the uneven economic recovery, the housing market is expected to move in a slow, gradual upward path in 2012, while encountering its share of speed bumps along the way, according to economists participating in a National Association of Home Builders construction forecast webinar in late April.

While monthly housing data in the first quarter showed signs of a slight softening, NAHB Chief Economist David Crowe said this is more reflective of typical month-to-month volatility in the numbers, rather than an indication of any significant downward trend in the broader housing market.

Pointing out that less volatile quarterly data have continued to show modest improvement in key housing indicators such as builder sentiment, new-home sales and housing production, Crowe said “the housing outlook continues to slowly brighten.”

Reflecting that sentiment, the U.S. Commerce Department reported that sales of new homes rose 3.3 percent in April. Over the past three months, new-home sales have averaged 344,000, up 14 percent from the 301,000 in the same period last year.

Other fundamentals remain positive for housing, he noted. Demographic factors include pent-up household demand and echo-boomers heading into their prime household formation ages. Historically favorable mortgage rates are expected to remain below 5 percent through next year. And the house price-to-income ratio has now returned to its historical average of about three-to-one vs. the nearly five-to-one during the height of the housing boom.

Housing still faces formidable challenges, he cautioned, such as rising foreclosures, persistently tight lending standards for homebuyers and builders, and difficulties in obtaining accurate appraisals. “No one is anticipating that an upward path for housing will run in a straight-line trajectory,” Crowe said. “The economy is in an uneven recovery, and we can expect some corresponding ups-and-downs in the housing market in the months ahead.”

NAHB projects new-home sales will climb from a record-low of 305,000 units in 2011 to 357,000 this year and 505,000 in 2013. Existing single-family sales are expected to follow suit, rising from 3.8 million last year to 4.4 million in 2012 and 5.4 million next year.

Likewise, housing starts are expected to improve, with single-family housing production increasing from 434,000 units last year to 503,000 this year and a more solid 660,000 in 2013.

On the multifamily side, starts posted a healthy 55 percent increase in 2011 over 2010. “A lot of newly formed households have become renters, so we need more rental units,” Crowe said. NAHB forecasts that multifamily starts will rise from 177,000 units last year to 216,000 in 2012 and 235,000 in 2013.

With many households choosing to stay in place and remodel their homes rather than move, residential remodeling is expected to rise 12 percent this year and another 7.9 percent in 2013, he added.

U.S. economic outlook
Delving into the economic forces that will influence housing in the next two years, Chris Varvares, senior managing director and co-founder of Macroeconomic Advisers, LLC, projected U.S. GDP growth of 2.6 percent this year and about 3.3 percent in 2013, barring any unexpected fallout from the eurozone debt crisis or runaway oil prices.

In the United States, the payroll tax holiday, emergency unemployment benefits and the Bush-era tax cuts are all due to expire at the end of the year. If Congress does not act, Varvares said, “we could be hitting a fiscal cliff.” On the plus side, he added, increasing household formations, rising real incomes, steadily upward payroll growth and a bullish stock market will contribute to the current economic expansion.

Varvares believes home prices have hit the trough. He expects prices to be flat this year and to rise 1.5 percent in 2013. Macroeconomic Advisors forecasts 514,000 single-family starts this year and 751,000 next year. Multifamily housing production should hit 221,000 this year and 238,000 in 2013.

“Our long-term analysis suggests that given the demographics, we need to build roughly 1.6 million units a year over the next decade to meet demand for housing,” Varvares said. “Obviously, we are now well below that. We do believe we will see a fairly nice run in 2013 and beyond as we need to build those units.”

Looking at various state statistics behind the national numbers, Robert Denk, NAHB’s assistant vice president for forecasting and analysis, noted a range of conditions across the country. Homebuilding nationwide bottomed out at an average of 27 percent of normal production, but individual states ranged from 10 percent to 50 percent of normal production.

Housing prices are drifting back to near-normal in many states. Some states, however, such as Arizona and Nevada, have seen an overcorrection of boom prices and will take longer to normalize. “What we are seeing is stabilization of house prices across the country, back to nearly their historical averages,” Denk said.

Nationally, foreclosure rates have dropped back down to an average of 1 percent. While they remain a problem in most markets, they are at crisis proportions in only a few, he noted.

The protracted housing recovery now under way will bring housing starts to 40 percent of normal production by the fourth quarter of this year and 55 percent of normal by the end of 2013, NAHB forecasts. Getting back to normal considerably faster will be oil states Texas and Oklahoma; coal and natural-gas producing Wyoming and Montana; and Iowa, supported by agricultural commodities.

Employment data sends mixed message
Employment data is a good indicator of activity in the construction sector. The unemployment rate for former construction workers fell to 14.5 percent in April, from 17.8 percent in April 2011 and 21.8 percent in April 2010, reports the U.S. Census Bureau. The total number of workers employed in construction (both residential and nonresidential) has remained flat for the past two years, however, suggesting that workers are being hired into other industries or are retiring, returning to school or quitting the labor force rather than waiting for rehiring by contractors. On a positive note, architectural and engineering services employment, a harbinger of future demand for construction, climbed for the sixth straight month, to its highest level since May 2009.

Ken Simonson, chief economist for the Associated General Contractors of America, noted that even after small losses in the first quarter, the construction sector added 63,000 jobs over the past year. “The plunge in the unemployment rate for former construction workers from 21.8 percent two years ago is good news. Unfortunately, few of them have found jobs in construction, which actually employed 1,000 fewer workers than it did in April 2010.”

Construction started losing jobs in 2006—more than a year before the rest of the economy—and did not touch bottom until February 2011, a year after other sectors, Simonson pointed out. Even in the past year, there have been construction job losses in half the months. “It is tough to attract and retain workers when employment gains are so spotty,” he said. “With workers finding jobs in other industries, retiring or returning to school, contractors face a potential shortage of skilled workers in a year or two.”

The 1.1 percent increase in construction employment over the past year was shared among all sectors of the industry. Looking at just the residential sector, employment among specialty trade contractors climbed by 33,100 or 2.3 percent, helped by a large increase in multifamily construction. Single-family homebuilding eked out a gain of just 700 workers (0.1 percent), AGC estimates.

Construction spending overall inched up in March to an annualized rate of $808 billion or 6 percent above year-ago levels, according to an AGC analysis of federal data. The biggest gains were in private nonresidential projects in manufacturing, energy and transportation. Public sector construction activity continues to decline.

Private residential spending was up 7.4 percent compared to March 2011. New single-family construction posted a 10.3 percent year-over-year rise. New multifamily construction was up 23.3 percent from the previous March, while spending on residential improvements moved up 2.6 percent year-over-year, AGC reports.

New-home construction won’t really take off until the market has worked down the excess inventory of existing houses. That process is well under way, reports the National Association of Realtors. Median existing single-family home prices are firming in many metropolitan areas, while improving sales and declining inventory are creating more balanced conditions, said Lawrence Yun, NAR chief economist. “We now have broad shortages of lower priced homes in much of the country, with very tight supply in Western states for homes through the middle price ranges,” he noted.

At the end of the first quarter, 2.37 million existing homes were available for sale, which is 21.8 percent below the close of the first quarter of 2011 when there were 3.03 million homes on the market. There has been a sustained downtrend since inventories set a record of 4.04 million in the summer of 2007, Yun said.

Total existing-home sales, including single-family and condo, increased 4.7 percent to a seasonally adjusted annual rate of 4.57 million in the first quarter. “This is the highest first-quarter sales pace since 2007,” Yun said. “With strong market fundamentals, total home sales this year should rise 7 to 10 percent.”

When will residential construction reach the tipping point when demand for new homes is no longer crippled by the oversupply of existing houses? Clearly that’s a process that will take at least another few years, provided the U.S. economy suffers no further setbacks along the way. Meanwhile, suppliers of metals and other building materials should find shelter in other markets.

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