High Unemployment Will Continue to Slow New Home Construction Growth

Residential News » Residential Real Estate Edition | By Michael Gerrity | January 20, 2010 9:57 AM ET

(LAS VEGAS, NV) -- According to economists speaking at the International Builders' Show in Las Vegas this week, the end of the economic recession along with the continuation of low mortgage interest rates and stabilizing housing prices will result in growth in the nation's housing market this year.
But improvements will come slowly, they said, as high unemployment levels continue to discourage consumers and push home foreclosures higher.

"The stage is set for the consumer to return," said David Crowe, chief economist of the National Association of Home Builders (NAHB), and because of the slow pace of the recovery home builders will profit from generally low inflation in building materials prices and wages.

The economists said they expect the extension and expansion of the home buyer tax credit to generate some sales activity in the early months of the year as economic growth gradually kicks in and bolsters an increase in housing activity.

However, Crowe warned that this remains "a cautionary period" for housing, largely because of the discouraging level of joblessness, which he forecast will peak at 10.2 percent in the first quarter and remain elevated, exceeding 8 percent at the end of 2011.

The inability of builders to obtain financing for new residential development is also "a significant retardant to recovery," Crowe said.

NAHB is forecasting 697,000 total housing starts in 2010, up 25.6 percent from an estimated 555,000 units last year. However, this year's recovery will occur entirely in the single-family sector, where starts are forecast to rise 37.7 percent from 443,000 last year to 610,000, he said. Suffering from an acute shortage of available financing, multifamily starts are expected to lose further ground in 2010, slumping to 87,000 units, down 22.3 percent from last year's 112,000 level.  In 2008, 285,000 multifamily units were started, which is near the level that is needed to keep the supply in balance with demand.

Just as it was following the recession of 2001, David Berson, chief economist and strategist for the PMI Group, predicted that the performance of the job market will be disappointing, with small businesses, a key engine of economic growth, not showing strong signs of expanding or hiring. Normally, steep downturns are followed by a period of vigorous growth, he said, but "it's different this time."

The anemic economic recovery and job market will hold down housing, he said, but they will delay a decision by the Federal Reserve to begin raising interest rates. "It's unlikely that the Fed will raise the federal funds rate until the job market gets stronger," he said.

The consensus of the economists was that mortgage interest rates were headed higher, but were unlikely to exceed six percent in the next year or two.

Berson noted that home prices have stabilized over the past six to nine months, but he said they are likely to register more declines this year as foreclosures, a lagging economic indicator, continue to rise. However, the extent of the price decline will depend on how many foreclosed homes come immediately back onto the market. To avoid depressing home prices, the servicers who own these properties have delayed returning them to the market.

"A big price decline could happen," he said, "but servicers probably will behave as they have in the past, not dumping new foreclosures on the market." However, this means that it will take longer for housing to start showing price gains again. Normally, housing should be appreciating by 4 percent annually, he said, but it could take a few years to reach that point.

Frank Nothaft, chief economist at Freddie Mac, said that a gradual upward drift in mortgage rates, especially during the second half of 2010, would reduce the refinancing of single-family mortgages by about 10 percent this year over last. Home purchase originations, on the other hand, are headed up, he said, thanks to a 10 percent to 15 percent increase in home sales.

Nothaft said that FHA and VA financing are headed for an even larger market share than last year's, accounting for 25 percent of originations in 2010, or maybe a bit higher.

Mortgage delinquencies haven't peaked yet, he added, and are unlikely to do so until several months after unemployment hits its peak. The number of mortgages on which home owners are behind by 90 days or more will probably continue to grow into the second half of 2010.

With fixed-rate mortgages at the end of last year at their lowest levels in 50 years, adjustable rate mortgages haven't been much in use, Nothaft said, commanding a measly five percent market share in 2009. However, there will be some gradual pickup in the number of home buyers using ARM s this year, with their share rising into the five percent to 10 percent  range.

Panelists noted that there will be large regional differences in the pace of the housing recovery that is now beginning. With lower unemployment than elsewhere and no major overhangs in the housing inventory, the Great Plains down through Texas, and the Southeast, with the exception of Florida and Atlanta, will be doing better than the country as a whole, said Berson.

Berson forecast 675,000 housing starts for 2010; Nothaft put them in the 770,000 to 780,000 range.

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