Down in the Doldrums
Depreciating Prices, Tighter Lending Standards
and Foreclosures Keeps Residential Recovery at Bay
By Sahely Mukerji
The present must be studied in the light of the past for
the purposes of the future, said John Maynard Keynes. Those pearls of
wisdom seemed to ring true during every economist’s forecast of 2012.
Hopes of the housing market finally turning the corner in 2010 were dashed
after the federal government’s homebuyer tax incentive program came to
a close and starts deteriorated sharply, according to McGraw-Hill Construction’s
2012 Dodge Construction Outlook. Combined with this year’s weaker economy,
housing starts have once again fallen to new lows. After a 5 percent increase
in 2010, total housing starts are expected to backslide 3 percent in 2011
before a hesitant recovery takes hold in 2012. Total housing starts will
climb 10 percent in 2012 to 640,000 units, according to the outlook report.
“The level of construction in 2011 will fall below [the] recession low
of 2009,” said Robert Murray, vice president of Economic Affairs, McGraw-Hill
Construction in New York, at the Outlook 2012 Executive Conference in
Washington, D.C., on October 19 “From [the] 2005 peak to 2011, it’s a
decline of 75 percent.”
Almost three years into presumed recovery, housing market conditions remain
weak, and the pace of home building recovery continues to be disappointing,
said Kermit Baker, chief economist of the American Institute of Architects
in Almost three years into presumed recovery, housing market conditions
remain weak, and the pace of home building recovery continues to be disappointing,
said Kermit Baker, chief economist of the 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. “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 long-term trend for home building is still several
This year, home sales have bounced along the bottom barely above that
level, and in August, after four months of decline, fell below the annualized
pace of 300,000 for the first time since February, according to the Dodge
New single-family home sales and housing starts have fallen to historic
lows, according to the Dodge Outlook. New single-family home sales reached
a record low rate in August 2010 at an annualized 278,000 homes sold.
“The single-family housing market is expected to slide 9 percent in 2011
to 405,000 units,” Murray said. “In 2012, starts are expected to go up
7 percent to 435,000 units.”
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.
Among the regions that are beginning to see house prices recover are the
Northeast, Texas and California markets, Baker said (see chart, top right)
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 (see chart above).
The focus of concern in the housing industry has shifted from oversupply
to insufficient demand, Baker said during his presentation, “The Outlook
for Homebuilding and Residential Remodeling,” at the Outlook 2012 Executive
“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
buildings over a 10-year period 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.” On average, 600 homes a day are foreclosed, he said.
Remodeling Market Not as Bad as Housing Market
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, he 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.”
Under the stimulus program, a growing share of contractors was working
on green projects, as well as distressed properties. 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 percent 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.
“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.
From the peak of the market in mid-2000 to its trough estimated in mid-2010,
spending levels 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 longterm 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
Reasons Behind the Bleak Market
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 the younger generation not buying homes 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
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
There is a change in attitude toward homeownership, Baker said. “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.”
This change in attitude has contributed to the extended bottom in housing
despite record low mortgage rates and highly affordable housing. At an
average of 4.76 percent, mortgage rates started 2011 at a higher level
than during the latter half of 2010, according to the 2012 Dodge Outlook.
“As the economy weakened, mortgage rates began to plummet and by August,
they averaged 4.27 percent,” Murray said. “Since then, they have fallen
even further, averaging just 4.11 percent in September and slipping below
4 percent—to the lowest level in record—in early October.”
Home prices also have fallen sharply. According to the S&P/Case Shiller
home price index, U.S. home prices in July 2011 (the most recent available
during press time) were 32 percent lower than at their peak in April 2006,
Murray said. Although the pace of decline is slowing, year-over-year prices
were still headed downward in July.
On the other hand, according to RealtyTrac, the number of foreclosure
filings reached a record high in 2010 at 2.9 million. This number of foreclosures
brought sales of foreclosed homes to 26 percent of last year’s existing
home sales, according to the 2012 Dodge Outlook. “Foreclosures have created
a large inventory of unsold homes, and the lower purchase prices associated
with these sales have had the effect of lowering overall home prices,”
Even with lower prices, home buying hasn’t picked up, because underwriting
standards have risen substantially.
“The decline in home prices has put many homeowners, who purchased within
the last seven years, underwater, owing more on their mortgages than their
home is worth,” Murray said. “This has made them unable to refinance or
purchase a new home without having to pay large sums out of pocket to
pay off the old mortgage. Roughly 11 million homeowners fell into this
category at the end of 2010.”
The housing market will not fully recover until the foreclosure issue
is resolved, and foreclosures “may pick up in early 2012,” Murray said.
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 firsttime home buyers get back in the market,
there will be an upturn,” Baker said. “Areas with stable house prices
will recover first. Strongest remodeling market is currently where house
prices have stabilized.” ?
Sahely Mukerji is a contributing writer for DWM magazine.
She can be reached at firstname.lastname@example.org
or follow her on Twitter @solarglazingmag.
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