Bottom Nears, But 2009 Looks Like Another Painful Year
2009 is shaping up as another painful year for the nation’s home building industry, according to economists speaking at last month’s International Builders’ Show in Las Vegas, but the bottom of the downturn is moving into sight, they said, conditions are expected to show improvement next year and a couple of years after that builders should be back to doing brisk business.
“Ultimately, we will get through this period and go back to demographic trends,” said David Berson, chief economist for the PMI Group. However, he said, “it will be two to three years before we get to that point and a more stable market.”
When good times do finally return, Berson said, builders should be breaking ground on an average 1.1 to 1.3 million single-family units annually, compared to his estimate of roughly 620,000 in 2008. Multifamily production will be moving ahead at an average annual clip in the range of 300,000 to 400,000 rental apartments and for-sale condominiums, up from an estimated 280,000 units in 2009. And total residential production, including manufactured homes, should leap into the 1.5 million to 1.9 million unit range, up from below 1 million last year.
The primary impetus behind the resurgence in home building will be household growth, he said. With households even this year expected to rise by some 1.4 million — significantly higher than the average 1.247 million households started during the 2004 to 2008 period — the underlying pent-up demand for housing is already picking up, he said. Projections show even more rapid household growth in the next few years, with an annual average of more than 1.5 million for the 2009 to 2012 period.
With housing affordability at the highest levels since the 1970s, he said, “the decision to buy or rent will tilt to buy in many parts of the country.”
Nevertheless, obtaining mortgage credit — especially among prospective buyers who cannot make a sizable downpayment, don’t have a good credit score and might not stand up to full documentation scrutiny of their application — remains a struggle for many, said Frank Nothaft, Freddie Mac's chief economist.
“The credit box for home mortgages and commercial mortgages has tightened,” he said, “and underwriting standards have tightened over and over.”
Nothaft noted that in the week prior to the IBS the average interest rate on 30-year fixed rate mortgages tracked by Freddie Mac dropped just below 5%, a record low in the company’s weekly surveys and the lowest point in 50 years.
Even though home purchases will be down this year, total single-family mortgage originations should rise to about $2 trillion, led by some growth in mortgage refinancings, which are forecast to account for 58% of the lending.
Jumbo loans, however, have remained “much more expensive,” he said, making home buying more difficult in the nation’s most expensive markets, such as those in California. Jumbos have been averaging 1.3 percentage points higher than rates for conventional loans, he said. Also, rates have been running higher for buyers with dings in their credit reports.
Offering some grounds for hope that the home mortgage system will eventually be restored to full health, Nothaft said that financing from the Federal Housing Administration has begun to play an important role. The FHA, he said, accounted for one-quarter of all single-family mortgage lending in the third quarter of last year, its biggest share in more than 60 years.
On the down side, delinquency and default rates will continue to rise in 2009, including some elevation in the number of prime borrowers who fall behind in their payments on conventional mortgages — which is not surprising at a time when the economy is experiencing sharp job losses, he said.
Nothaft said that the multifamily sector has now also started displaying signs of deterioration, including flat or falling rents and rising vacancy rates. Apartment values have also shown weakness, he said, though not as substantial as what has been occurring in the single-family sector.
Ongoing home price declines remain a major concern for home builders, according to NAHB Chief Economist David Crowe. With foreclosures growing to 2 million a year, builders are now having to compete with a constant supply of properties returning to the market. Matching fire-sale prices can be tough, he said, because “builders have a fixed cost embedded in the house.”
Only 12% of the builders recently surveyed by NAHB reported that they were not offering incentives – such as price cuts or no-cost amenities — to bolster lagging sales.
Supporting growing warnings from national economists that Congress and the Administration need to embrace policies to end the downward spiral in housing prices in order to ensure the success of any economic stimulus program, Berson cited disturbing findings from PMI’s proprietary U.S. Market Risk Index.
The index, which measures the likelihood of lower homes prices in two years for each of the nation’s 381 metropolitan statistical areas and divisions, found that a full 97% of them saw the odds rise in last year’s third quarter as the economic and housing downturns continued to expand. The risk of lower prices two years hence was more than 50% in half of the nation’s 50 largest cities, he said.
Crowe said that NAHB is projecting a further 29% decline in total housing starts this year and a 14% drop in new single-family home sales.
On the bright side, Crowe predicted that sales should bottom out in this year’s first quarter and then begin slowly moving forward, paving the way for a gradual improvement in production that will gain force next year.
However, in the aftermath of the unprecedented events in the financial markets of the past several months, “economists are struggling to predict the future,” Crowe said, making efforts in Washington to spark a turnaround in home buying demand all the more important.
With consumer confidence plummeting and job losses surging, he said, “people are afraid to go out and make major purchases.”
Free NAHB Kit Gives Builders Back-to-Basics Tips to Navigate the Slowdown
What was once expected to be a relatively mild housing slump following three years of record new home construction and sales has given way to a significant downturn.
To help members navigate the uncharted waters of this slowdown, NAHB has compiled a comprehensive “Back to Basics” online toolkit — the best of the basics, the tried and true and the truly new. To access the toolkit, click here.
To access the “Back to Basics” toolkit, you must be an NAHB member and have a login to www.nahb.org. To create a login, go to www.nahb.org/login or click on the log-in button on the main menu bar.
For assistance, call the NAHB Member Service Center at 800-368-5242.