Posted on Wednesday, February 16, 2011
ORLANDO, FLA. (Feb. 15, 11:50 a.m. ET) — The forecast for housing starts for 2011 is sobering, no matter what economist you ask, or in what context you place those forecasts. So it’s likely to be a rough year ahead for many companies that supply the building and construction industry, particularly window and door manufacturers, and vinyl siding manufacturers.
The least optimistic of the economists at the International Builders Show, held Jan. 12-15 in Orlando, was Ed Sullivan, chief economist and vice president of economic research for the Portland Cement Association.
He predicted only 492,000 single-family housing starts in 2011 — or an increase of just 3.4 percent from the 475,000 in 2010.
Ed Sullivan (Portland Cement Association photo)
“I do not see any significant increase in starts this year,” Sullivan said at the IBS. “Lending standards will be tight, and foreclosure activity will equal or exceed 2009. That puts increased inventory into the market and downward pressure on prices.”
Slightly more optimistic were David Crowe, chief economist for the National Association of Home Builders and Frank Nothaft, chief economist for Freddie Mac, who both predicted an upturn in single-family home starts of 100,000 to 575,000.
“Home sales will struggle, but we are confident we will begin to see a pickup in activity,” Crowe said.
But keep in mind that last year’s forecast from Crowe was even more optimistic and did not even come close to reality as the housing market collapsed after the federal tax credit expired for new home buyers at the end of April.
Single-family housing starts in 2010 were far off the 675,000 to 700,000 that Crowe had predicted at IBS a year ago, and well off the record pace of 1.7 million in 2005. In addition, eight of the 12 months in 2010 set record lows for housing starts going back to the 1960s, he said.
“About midyear, we hit a flat spot and everything went flat — not just housing,” explained Crowe. “A lot of things happened, there was a lot of uncertainty and things just froze in place. And things are still relatively soft heading into 2011. We’re coming into 2011, not having a very good latter half of 2010. The latter half of the year was much poorer than the first half.”
Nevertheless, Crowe is convinced that things will improve in 2011.
“Why do I believe there will be an improvement?” Crowe asked. “There is an enormous pent-up demand, and durable good sales of automobiles and furniture are up. I expect the gross domestic product to increase by 3.5 to 3.8 percent by the end of the year. Home sales are going to struggle, but they will follow employment gains and by the end of 2012, we should be adding over 200,000 jobs per month and that’s solid.”
Nofhaft of Freddie Mac — whose projections both last year and this year were virtually identical to Crowe’s — also is convinced that everything is in place for a recovery, albeit a small one.
“The strengthening of economic growth and job creation will help support housing demand, and housing affordability is at an extraordinarily high level. We expect 575,000 starts in 2011. We are at least moving in the right direction.”
But Sullivan, who has been honored by the Federal Reserve Bank of Chicago for the accuracy of his forecasts, disagreed with that consensus forecast from NAHB and Freddie Mac.
He said tight lending standards, a high home inventory count and unstable housing prices will hold the market back, and that the foreclosure environment will add to inventories and depress prices, offsetting any favorable conditions in 2011 arising from employment gains and improved home affordability.
“Slow growth in employment, coupled with a continuation of tight lending standards will likely result in only modest year-over-year gains in home sales,” Sullivan said. “On the supply side, foreclosures are expected to equal 2010 levels, adding more than 1 million bank-possessed properties to the market. This simple assessment suggests inventories will remain elevated and downward pressure on home prices will remain in place. These conditions will send a clear signal to home builders to restrain building activity in 2011.”
In addition, Sullivan said that the high home inventory levels are even more problematic than normal because they include “a large portion of bank-possessed properties.” Banks are estimated to own about 25 percent of the homes currently on the market, he said.
“Banks are not in the realty business and will offer the homes below prevailing home market prices to remove the financial liabilities of possessed homes from their books,” Sullivan said. “These homes, some nearly new, compete directly with new homes for the home buyer — putting downward pressure on new-home prices.”
New-home sales in 2010 were 320,000, down from 374,000 in 2009, which put them at the lowest level since 1963 and some 75 percent below 2005, when they peaked at 1.3 million.
“There are two key criteria builders look at when making decisions to build,” said Sullivan. “They look at housing price stability and inventory. They need a small inventory — five months of existing homes — in the housing market, and home prices that are stable or increasing,” Sullivan said. “Absent either one of those, you do not get a substantial increase in starts.
“The inventory of homes right now is 9.1 months,” said Sullivan. “Can you get enough growth in sales to eat up existing inventory in 2011? We don’t think so. And I expect home prices to stay flat.”
Crowe also believes house prices will remain unchanged in 2011.
But Freddie Mac’s Nothaft is slightly more optimistic than Sullivan and NAHB’s Crowe about where home prices are headed. “Housing prices will bottom out in 2011, maybe by springtime, with some improvement thereafter and certainly by 2012,” he said. “That will help home sales because there are buyers with the financial resources to buy, but they have held off because prices are still going down.”
Crowe acknowledged that any potential recovery in new home building is fragile because of the glut of houses on the market, a continuing increase in the number of foreclosed homes, and the difficulties small builders face in getting financing.
“One of the fragile components for a recovery will be how successful builders will be in their attempts to get credit,” Crowe said. “That is still a major challenge for them, especially for small builders.”
In addition, there is an undetermined amount of shadow inventory — that is, homes owned by banks but not on the market, estimated to be anywhere from one-half million to 7 million.
“Until those homes are sold, it means a further delay in the recovery,” Sullivan said.
In addition, bank appraisals are raising havoc with potential sales, Crowe said.
“Some 33 percent of builders said they lost a sale in 2010 because the appraisal was less than what the cost of construction would have been,” he said.
Not surprisingly, the housing forecasts beyond 2011 also differ greatly. While Crowe projects housing starts to jump to 860,000 in 2012 — an increase of more than 53 percent from what he expects for 2011 — Sullivan sees housing starts reaching just 690,000 in 2012, before jumping to 945,000 in 2013 and 1.18 million in 2014 and 1.24 million in 2015.
“Construction will look good in 2013, 2014 and 2015 because of pent-up demand,” Sullivan said.
The number of permits requested by builders in December rose 16.7 percent from the previous month. But whether that will translate into a good 2011 is questionable.
“It remains to be seen if the availability of financing for new construction and existing viable projects will improve in order to make building feasible and facilitate a housing and economic recovery,” said Bob Nielson, NAHB chairman and a residential home builder based in Reno, Nev.
“We see jobs growth as the key to a housing recovery,” said Sullivan. “Tight lending standards are tied to the job market. The more jobs that are created, the quicker lending standards will come down, and people will be able to buy homes. This is all an inventory situation. Once the inventory is worked down, prices will start to stabilize, and housing starts will increase.”
Housing Starts on Wednesday
We will get the data on housing starts (and building permits) tomorrow. The consensus expectation is for a small increase to a seasonally adjusted annual rate of 540,000 for starts, but for permits to dip to an annual rate of just 580,000.
Just to put those numbers in perspective, the bubble highs were at 2.273 million (1/06) and for permits at 2.263 million (10/05). While there is no consensus estimate for the single-family-only starts, they were at just 417,000, down from a peak of 1.823 million (1/06).
OK, perhaps it is not fair just to compare the levels to what were in hindsight ridiculously high bubble levels. Still, over the last 40 years, the average level of total starts has been 1.501 million, while the average level of single family starts has been 1.066 million. Thus in December, total starts were 76.2% below peak levels, and 64.0% below long-term average levels.
For single family starts (which tend to be more stable than multi-family starts, which can be extremely volatile from month to month) we were 77.1% below peak, and 60.9% below 40-year average levels. That is despite substantial population growth over the last 40 years.
Working Off Inventory
The silver lining to the low level of starts is it means that we are not adding a lot of housing supply. That is a very good thing in light of the existing glut of housing inventory. The inventory is all on the existing home side (particularly if you include shadow inventory). The absolute level of new home inventories is near an all-time record low.
However, a used home is a good substitute for a new home. Thus we are far from out of the woods on housing. Eventually, the combination of a bigger population and a higher rate of household formation will absorb the excess inventory and the housing market will begin to revive.
At that point the homebuilders will be able to start a lot more homes, and that will fuel strong economic growth. That, however, is more a story for the second half of 2011 at the earliest, and more likely a 2012 story.By Mike Verespej | PLASTICS NEWS STAFF