Homebuilding Recovery Process Moving from Oversupply to Weak DemandOctober 21st, 2011 by DWM Magazine
by Sahely Mukerji
The focus of concern in the housing industry has shifted from oversupply to insufficient demand, said Kermit Baker, chief economist of the American Institute of Architects in Washington, D.C., during his presentation, “The Outlook for Homebuilding & Residential Remodeling,” at the Outlook 2012 Executive Conference in Washington, D.C, on October 19.
“Overbuilding is now less of a concern after years of record low completions,” Baker said. “We’ve averaged between 17 million and 17.5 million in new building over 10-year periods since 1997, but in the last 10 years, we’ve built 16 million new houses.” However, despite low completions, excess vacancies remain abnormally high, he said. “There are still 1.1 million vacant homes not for sale or rent [up from less than 600,000 in 2008], and these are vacation homes, foreclosed homes, and homes used occasionally.” In average, 600 homes a day are foreclosed, he said.
The housing weakness is related to anemic household growth, Baker said. From 1995-2000, the annual average of housing growth was 1,150,000, and in 2011, it is estimated to be 800,000. The slowdown in household growth is largely due to falling young headship and less immigration, he said. “Immigrants are not coming looking for economic opportunities. The age group under 30 is not forming households. They’re living with their parents.”
While the overall household growth is resuming, the number of owners is still falling fast. “The number of renters is growing by 1.5 million a year, and the number of owners is falling by half a million per year,” Baker said. “The growth in renter household is helping absorb some excess single-family homes.”
There is a change in attitude toward home-owning, Baker said. “It’s a negative attitude toward home ownership: it’s constraining, and you can lose money,” he said. So, major reasons for owning a home are not financial anymore, and less shaken by bust. The younger generation’s American dream is not owning a home anymore.”
House prices are beginning to recover in key Northeast, Texas and California markets, and metro areas with recovering house prices are seeing fewer homeowners underwater.
Typically, housing is an early sector to rebound in the 20 percent to 30 percent range in the first year of recovery, Baker said. “We haven’t seen that this time,” he said. “Prices fell off 30 percent from the peak. The low point in housing was in early 2009. Following that there was growth in the next few quarters. New home sales are down 15 percent. Housing starts are up 10 percent. Home sales are up 5 percent.” The outlook for home building is under 600,000 this year, under 800,000 next year, and nowhere near the 1.6 million range peak in 2009, he said.
The remodeling market declined 20 percent during the downturn, but has stabilized recently, Baker said. “Two of the strongest sectors are energy-efficiency upgrades and reinvesting in distressed properties,” he said. “Even with the downturn, the remodeling market is nearly $300 billion.” From the peak of the market in mid-2000 to its trough estimated in mid-2010, spending level fell between 15 percent and 20 percent, he said. “Remodeling has contributed a growing share of residential investment since the downturn: about 70 percent last year, and probably the same this year,” he said. Homeowner improvement spending of $185.1 billion was evenly split between discretionary and replacements in 2009. Discretionary was 45 percent, and exterior remodeling/systems upgrade was about 44 percent.
Homeowner mobility has fallen sharply during the recession, slowing the remodeling growth, Baker said. “New and long-term owners have different spending priorities,” he said. “New homeowners do more customization projects, while long-term owners do more replacement projects, because they’ve already done their customizations.” The mortgage lock-in effect — where homeowners have low mortgage rates and are sitting tight – are also keeping the mobility rating trend down, he said. “Lower mobility rates will continue in the near future.”
Under the stimulus program, a growing share of contractors was working on green projects, as well as distressed properties, Baker said. “With all the foreclosed homes, the trend of distressed properties will continue,” he said.
Planned spending on home improvements is up, but unusually volatile, Baker said. “Discretionary projects have seen steady improvement over the last two years, as they’ve moved back from decline to growth. The exterior replacement and systems (HVAC) have been volatile, probably because of the severe weather pattern across the country.”
The Leading Indicator of Remodeling Activity (LIRA) shows that weakness will resume later this year, Baker said. The homeowner improvement total of $116.8 billion in the third quarter of 2011 will go down to $105.6 billion in the first quarter of 2012, a 4.8-percent LIRA decline, and then go up a tad to $110.1 billion in the second quarter of 2012.
Overall, the homebuilding recovery process is moving from oversupply to weak demand, but poor economy and unstable house prices continue to discourage new entrants. “When the first-time home buyers get back in the market, there will be an upturn. Areas with stable house prices will recover first. Strongest remodeling market is currently where house prices have stabilized.”
In conclusion, Baker said that the foreclosure crisis is making us sick. “According to the NBER Working Paper No. 17310, August, 2011, by Janet Currie of Princeton University and Erdal Tekin of Georgia State University, areas with high housing foreclosures over the 2005-2009 period are associated with increased medical visits for mental health, and for stress-related physical complaints,” he said. “Most harmful effects were on individuals aged 20 to 49. And African-Americans and Hispanics felt the larger effects.”