Long-term Trend for Home Building Several Years Away, Economists Say

October 18th, 2011 | Category: Industry News

By Sahely Mukerji

Home improvement spending declined about 20 percent during the economic downturn, but has stabilized recently, said Kermit Baker, chief economist of American Institute of Architects in Washington, D.C., during his presentation at Reed Constructions Data’s Webinar, “Flat, Down or Up? Where is Construction Heading?” on October 13. Other speakers included Ken Simonson, chief economist of AGC of America in Arlington, Va., and Bernard Markstein, chief economist of Reed Construction Data in Norcross, Ga.

Almost three years into presumed recovery, housing market conditions remain weak, and the pace of home building recovery continues to be disappointing, Baker said. “The recovery is increasingly regional, and the markets where house prices are stronger are areas that should see the strongest gains,” he said. “Returning to a long-term trend for home building is still several years off.”

Typically, housing is an early sector to rebound in the 20 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.

Among the regions that are beginning to see house prices recover are the Northeast, Texas and California markets, Baker said. The 10 metros with the largest change in the house price index, year over year, August 2010-August 2011 are: Boston, New York, Philadelphia, Pittsburgh, Washington, D.C., Indianapolis, Dallas, Austin, Texas, San Antonio, Texas, and San Jose, Calif. The 10 metros with the largest decrease are: Minneapolis, Detroit, Cleveland, Chicago, Atlanta, Tampa, Fla., Phoenix, San Diego, Las Vegas and Sacramento, Calif. The national average of house prices is down 4.4 percent.

Metro areas with recovering house prices are seeing fewer homeowners underwater, Baker said. The national average of mortgage amounts underwater is 22.5 percent.

Even with the downturn, the remodeling market is nearly $300 billion, Baker said. In 2007, homeowners and rentals spent $326 billion in remodeling, and in 2011, they are forecasted to spend $278 billion, he said. “The remodeling market doubled between 1995 and 2007,” he said. “The trough was in mid-2010, when the market saw between 15 and 20 percent decline. New construction was down 75 percent.”

Green home improvements took up a big share in the remodeling market, Baker said. “In 2009, a quarter of the projects had energy efficiency as their goal under the stimulus program. Distressed properties were a third of the projects reported by contractors.” Between 2009 and 2010, 26 to 29 percent of projects saw energy-efficient and environmentally sustainable products installed, he said. In the third quarter of 2011, it is 24.9 percent. From the third quarter of 2010 to the third quarter of 2011, the share of firms working on homes purchased after homeowner default or ban foreclosure went up from 35.2 percent to 36.5 percent, he said.

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.

Commercial property values fell further than house prices, but a recovery seems to be underway, Baker said. “House prices fell 30 percent from 2006 to 2009,” he said. “Commercial property value fell 40 percent from 2007 to 2009, but has recovered 15 percent of their loss.”

In overall outlook for construction, the Architectural Billing Index (ABI) reversed in August after four straight months of decline, Baker said. “All major building sectors – residential, commercial/industrial and institutional — have stumbled with the recent weakness in the ABI,” he said. “Likewise, firms in all regions have seen a recent softening in activity.”

Commercial real estate lending fell off during the downturn and now seems to be lagging in demand, Baker said. “Banks began tightening their lending standards in 2007, and have only recently started easing up some,” he said. “During 2007-09, owners/developers weren’t looking to borrow, but now the demand has started to pick up, but lending’s not easing up. In the last 6-9 months, 70 percent of architect firms nationwide reported stalled projects due to financing problems.”

In the coming decade, school populations, young workers and active retirees will dominate growth, Baker said. “The Census Bureau estimated 28.8 million growth in population over 2000-2010,” he said. “In 2010-2020, the projections are 31.2 million population growth. There will be a very strong growth among baby-boomers, which indicates growth in health care. Their children will enter the work force, and their grandchildren will have a pretty strong growth, as well, meaning there will be a healthy population in the school sector.”

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