Optimistic Outlook for Housing, but Challenges Remain
Economists participating in the May 18 NAHB Construction Forecast Conference Webinar agreed that the housing market is on the road to recovery, but cautioned that several factors could contribute to a bumpy ride in the coming months.
“Home buyer tax credits clearly did their job and got people back into the marketplace,” said NAHB Chief Economist David Crowe, who also served as moderator of the two-hour webinar.
With the expiration of the tax credits in April, Crowe said the housing momentum is being carried forward by low interest rates, pent up household formations, stabilizing prices and budding employment growth.
However, many factors continue to drag on housing at this time—including the critical shortage of credit for new and existing projects, competition from short sales and foreclosures and regional economic disparities.
The availability of acquisition, development and construction financing remains a major concern as the industry moves forward, Crowe said. “Builders still tell us that credit is extremely tight. Banks are saying not so much. That gap is an indication that something is broken, at least when it comes to residential construction.”
NAHB is forecasting 552,000 single-family starts in 2010, up 25 percent from last year’s 445,000 level, which was the lowest annual output since 1959 when the government began collecting this data.
Suffering from an acute shortage of available financing and a significant shadow inventory of homes lost to foreclosure that are competing against normal inventory, Crowe said that multifamily housing starts are expected to lose further ground this year, falling 18 percent to 93,000 units, before rebounding to 150,000 units in 2011.
Crowe anticipates that nationwide home prices will remain flat this year and post a modest increase in 2011 and that mortgage interest rates will continue to stay low, barely breaking 6 percent by the end of this year, and not rising much above that level through 2011.
The road back to normal levels of residential construction will be longer for some states than others. By the end of 2011, the top 20 percent of the states will see their production levels back to normal. Those states include Texas, Oklahoma, Montana, Wyoming, Tennessee, Louisiana, Mississippi, Alabama and Arkansas and Kansas. The previous boom markets in California, Arizona, Florida and Nevada, along with the Great Lake states of Michigan, Indiana, Ohio, Illinois and Wisconsin that were hit by deep cuts in auto production and manufacturing, will be the last ones to recover.
Housing Demand Reflects Job Growth
Like his co-panelists, Mark Zandi, chief economist of Moody’s Analytics, said that housing will improve as the job market does. He forecast that the economy will average monthly job gains of 125,000 this year, 250,000 in 2011 and 300,000 in 2012.
Mirroring anticipated employment growth, Zandi expects GDP to rise 3 percent this year, approximately 4 percent in 2011 and closer to 5 percent in 2012.
The key factor driving housing demand is jobs, said Zandi. “We’re not going to get home sales unless we have jobs. Here the prospect is good. Business balance sheets are in good shape and improving rapidly. These are pre-conditions for better job growth and we should see the job market steadily gain traction.”
Zandi forecast that overall housing starts will total 700,000 units this year, close to 1 million in 2011 and about 1.7 million by 2012, which he describes as close to trend and consistent with demographics in a normal functioning economy.
Driven largely by the high foreclosure rate, Zandi expects that home prices will continue to fall modestly in 2010, down about 5 percent on a national average. He calculates that the difference between supply and demand is approximately 750,000 units annually, and it will require until the end of 2011 to work off this extra inventory.
“The good news,” he said, is “as the job market improves, so will household formations and demand. So I anticipate we will work off the excess inventory more quickly than the two-year period.”
He added that most of the housing surplus is regionally concentrated in Florida, around Atlanta, along the South Carolina coast, in Las Vegas, Nev., Phoenix and Tucson, Ariz., and in the central valley of California.
Consumers Fuel Recovery
Taking the most bullish approach to the ongoing recovery, Chris Varvares, president of Macroeconomic Advisers, LLC, forecast that GDP will rise 3.7 percent this year and that housing starts will total 750,000, well above the Blue Chip Economic Indicators consensus of 690,000.
“Personal consumption expenditures are making a very solid recovery,” said Varvares. “Residential investment is going from a drag to a contributor. The difference between our forecast and the consensus is the strength in personal consumption and housing.”
Although the huge number of foreclosures on the market are accounting for about 300,000 to 400,000 fewer starts than there otherwise would be, Varvares said the fundamentals still point to a solid trajectory for housing.
“With prices stabilizing, demand is picking up and we expect builders to respond. By the end of 2011, we expect about 1.2 million housing starts. This suggests we can have recovery in starts this strong while simultaneously working down excess housing inventory.”
The panelists were in unanimous agreement on a number of areas—the Federal Reserve will likely continue to keep interest rates near rock bottom levels at least through the end of the year; the chance of a double dip recession is extremely slim; and policymakers will need to take action within the next two years to increase revenues and cut spending to rein in the burgeoning structural deficit.
Housing Stays Highly Affordable for Fifth Consecutive Quarter
Nationwide housing, bolstered by favorable interest rates and low house prices, hovered for the fifth consecutive quarter near its highest level of affordability since the series was first compiled 19 years ago, according to the National Association of Home Builders/Wells Fargo Housing Opportunity Index released May 20.
The HOI showed that 72.2 percent of all new and existing homes sold in the first quarter of 2010 were affordable to families earning the national median income of $63,800, slightly higher than the previous quarter and near the record-high 72.5 percent set during the first quarter a year ago.
“Today’s report is very encouraging because it indicates that homeownership continues its more than year-long trend of remaining within reach of more households than it has for almost two decades,” said NAHB Chairman Bob Jones, a home builder from Bloomfield Hills, Mich. “With interest rates still hovering at low levels, companies starting to hire new employees and the economy beginning to rebound, this should encourage more home buyers to enter the market and help further stabilize housing and the economy.”
Indianapolis-Carmel and Youngstown-Warren-Boardman, Ohio–Pa., shared the ranking as the most affordable major housing markets in the country. In Indianapolis, which has held this top ranking for nearly five years, almost 95 percent of all homes sold were affordable to households earning the area’s median family income of $68,700. In Youngstown, the same percentage of homes was affordable to households earning a median $53,500.
Also near the top of the list of the most affordable major metro housing markets were Syracuse, N.Y.; Dayton, Ohio; and Grand Rapids–Wyoming, Mich.
Five smaller housing markets posted even higher affordability scores than Indianapolis and Youngstown. Among them, Bay City, Mich., where 98.7 percent of homes sold during the first quarter of 2010 were affordable to median-income earners, was the most affordable market in the country. Other smaller housing markets near the top of the index included Kokomo, Ind.; Davenport-Moline-Rock Island, Iowa-Ill.; Sandusky, Ohio; and Elkhart-Goshen, Ind., respectively.
New York-White Plains-Wayne, N.Y.–N.J., continued to lead the nation as its least affordable major housing market during the first quarter of 2010. Slightly less than 21 percent of all homes sold during the quarter were affordable to those earning the New York area’s median income of $65,600. This was the eighth consecutive quarter that the New York metropolitan division has occupied this position.
The other major metro areas near the bottom of the affordability scale included San Francisco; Honolulu; Santa Ana-Anaheim-Irvine, Calif.; and Los Angeles-Long Beach-Redwood City, Calif.
San Luis Obispo-Paso Robles, Calif. was the least affordable of the smaller metro housing markets in the country during the first quarter. Others near the bottom of the chart included Ocean City, N.J; Santa Cruz-Watsonville, Calif.; Napa, Calif.; and Flagstaff, Ariz.
Please visit www.nahb.org/hoi for tables, historic data and details.
Builder Confidence Continues to Strengthen in May
Builder confidence in the market for newly built, single-family homes rose for a second consecutive month in May to its highest level in more than two years, according to the latest National Association of Home Builders/Wells Fargo Housing Market Index, released May 17. The HMI gained three points to 22 in May, its highest point since August 2007.
“The really encouraging part of today’s HMI is that sales expectations for the next six months continued to gain, despite the expiration of the home buyer tax credits at the end of April,” said NAHB Chief Economist David Crowe. “This means builders are more comfortable that the market is truly beginning to recover, and that positive factors for buying a new home—low interest rates, great selection, stabilizing prices, and a recovering job market—are taking the place of tax incentives to generate buyer demand.”
Crowe was quick to point out, however, that while builder confidence has improved from the depths of the housing downturn, it is still quite low by historic standards. “Obviously we still have a long way to go, and it’s worth repeating that continued challenges such as the critical lack of project financing, inappropriate appraisal procedures, competition from short sales and foreclosures, and the soaring costs of some building materials are major obstacles on the path to a healthier housing market and economy,” he said.
Derived from a monthly survey that NAHB has been conducting for more than 20 years, the NAHB/Wells Fargo Housing Market Index gauges builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair” or “poor.” The survey also asks builders to rate traffic of prospective buyers as “high to very high,” “average” or “low to very low.” Scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view sales conditions as good than poor.
Each of the HMI’s three component indexes posted three-point gains in May. The component gauging current sales conditions climbed to 23, its highest level since July of 2007. The component gauging sales expectations in the next six months rose to 28, its highest point since November 2009, and the component gauging traffic of prospective buyers improved to 16, its best showing since September 2009.
The HMI also posted gains in every region in May. The Northeast, which has the smallest survey sample and is therefore subject to greater month-to-month volatility, rose 14 points to 35, its highest point since June of 2007. The Midwest posted a two-point gain to 17, while the South registered a one-point gain to 22, and the West posted a seven-point gain to 20.
April Construction Falls 9 Percent
New construction starts in April dropped 9 percent to a seasonally adjusted annual rate of $397.6 billion, according to McGraw-Hill Construction, a division of The McGraw-Hill Companies. Much of the decline was due to a pullback for nonresidential building, which in recent months had appeared to be stabilizing after the steep downturn experienced in 2009. The housing sector also lost momentum in April, slipping back after recent gains. Running counter in April was nonbuilding construction, which registered moderate growth as the result of heightened activity for environmental public works and electric utilities. During the first four months of 2010, total construction on an unadjusted basis came in at $125.8 billion, essentially the same amount as reported a year ago.
The April data lowered the Dodge Index to 84 (2000=100), down from a reading of 92 in March. The Dodge Index had reached its most recent low in February 2009 at 82, and since then it has hovered in the range of 84 to 95.
Nonresidential building in April plunged 23 percent to $120.1 billion (annual rate). A number of categories had been lifted in March by support coming from large projects, and the absence of such support in April contributed to steep declines. The amusement-related category plummeted 72 percent, office construction dropped 48 percent, and the manufacturing building category in April fell 33 percent.
Also retreating in April was the educational building category, down 10 percent; and warehouses, down 13 percent. On the plus side, a few nonresidential categories in April were able to post gains. These included stores and shopping centers, up 6 percent; and hotels, up 35 percent; both relative to very low amounts in March. The transportation terminal category in April soared 90 percent, the public buildings category grew 14 percent, and church construction was unchanged.
Residential building, at $136.8 billion (annual rate), decreased 7 percent in April. Single-family housing dropped 8 percent, in a departure from the steady improvement that had been shown after this category hit bottom in January 2009. By region, single-family housing in April revealed the largest decline in the South Atlantic, down 13 percent; followed by the South Central, down 12 percent; the Midwest, down 3 percent; and the West and Northeast, each down 2 percent. Multifamily housing in April eased back 1 percent, receding after the increases reported during the prior two months.
The “no change” shown by total construction on an unadjusted basis for the first four months of 2010 was due to a mixed pattern by sector. Residential building was up 34 percent, with the comparison to the early months of 2009 when single-family housing was especially weak. Nonbuilding construction year-to-date slipped 2 percent, as a 7 percent gain for public works was offset by a 41 percent reduction for electric utilities. Nonresidential building year-to-date fell 18 percent, due to this pattern by major segment – commercial building, down 38 percent; manufacturing building, down 71 percent; and institutional building, down 5 percent. By region, total construction in the first four months of 2010 revealed this performance: the Northeast, up 23 percent; the West and South Central, each with “no change”; the South Atlantic, down 3 percent; and the Midwest, down 13 percent.
Additional perspective comes from looking at 12-month moving totals, in this case the 12 months ending April 2010 versus the 12 months ending April 2009. On this basis, total construction is down 14 percent, as the result of this pattern by sector: nonresidential building, down 26 percent; residential building, down 7 percent; and nonbuilding construction, down 4 percent. By region, the 12 months ending April 2010 showed the following behavior for total construction relative to the previous 12 months: the Northeast, up 1 percent; the South Atlantic and South Central, each down 14 percent; the West, down 16 percent; and the Midwest, down 24 percent.
Tax Credits Boost New-Home Sales in April
Sales of newly built, single-family homes surged 14.8 percent to a seasonally adjusted annual rate of 504,000 units in April as consumers rushed to beat the deadline for expiring home buyer tax credits, according to data released May 26 by the U.S. Commerce Department. This was the strongest level of new-home buying activity since May 2008.
Three out of four regions posted substantial gains in new-home sales in April; the Midwest registered a 31.6 percent gain, the South, a 10.8 percent gain, and the West, a 21.7 percent gain. The Northeast posted no change in sales activity from the previous month.
The nationwide inventory of new homes on the market fell 5.8 percent to 212,000 units in April, its slimmest measure since October of 1968. Meanwhile, the month’s supply at the current sales pace declined from 6.2 in March to a modest 5.0 in April, the lowest since November 2005.
ASA of Arizona Shows Leadership in Securing Prompt Pay of Retainage and Final Payment
A new law (S.B. 1375) signed by Arizona Gov. Jan Brewer (R) on May 11, 2010, adds requirements for timely payment of retainage and final payments to the state’s prompt payment statute for construction. The law, supported by the American Subcontractors Association of Arizona and its allies representing a range of the state’s construction industry, establishes a payment cycle according to which non-residential project owners, prime contractors, and subcontractors normally will have to pay retainage and final payments for properly completed construction services and materials, or else pay a penalty of 1.5 percent interest per month.
The law, which applies to projects for which contracts, plans or specifications are distributed on or after Jan. 1, 2011, will require prime contractors to submit timely applications for payment according to the project’s billing cycle (normally 30 days). Unless stated otherwise in the construction plans, project owners will have to approve within 14 days, and pay within 7 days after that, proper invoices for retainage that subcontractors submit at substantial completion of their work. The law will also establish a 21-day cycle for project owners to pay prime contractors’ proper invoices for final payment. It will limit owners’ withholding of such payments to 150 percent of the reasonable costs to complete any work that is under dispute.
Prime contractors and subcontractors will have seven days from receipt of retainage and final payment to pay their subcontractors and material suppliers, except when reasons for withholding are detailed in a written notice. The law will entitle subcontractors to written notifications of retainage releases by owners once subcontractors request such notifications. It will specifically protect subcontractors from wrongful withholding for defective work or materials that are not their fault. Where subcontractors are not at fault, the law says, “The contractor shall nevertheless pay any subcontractor or material supplier … within 21 days after payment would otherwise have been made by the owner.”
People & Companies in the News
The Bilco Company, New Haven, Conn., announces the retirement of Dominic DeConciliis, its vice president of sales and marketing.
DeConciliis joined Bilco in 1989. Among his accomplishments in two decades with Bilco, DeConciliis spearheaded the development of the company’s international strategy, establishing a presence for Bilco and its products in over two dozen countries around the globe. He also expanded the company’s presence in domestic markets for its existing products and through the development of new products, and broadened sales channels for both the company’s architectural and residential product markets.
DeConciliis will remain with the company through the end of September 2010 as part of its transition strategy.
Hilti, headquartered in Schaan, Liechtenstein, has been honored with the most significant award in the design industry, joining such well-known brands as Apple, Adidas, Audi and BMW. Hilti’s Chief Designer Stephan Niehaus and the Hilti design team will receive the Red Dot Design Team of the Year Award. The award will be presented at a ceremony to be held July 5 in Essen, Germany.
The “Red Dot” is one of the most prestigious and largest international design competitions. In addition to the annual awarding of the Red Dot Design Award for products with outstanding design quality, the organizers have also handed out an award honoring the design team of the year since 1988. This is the highest award given within the design community, and it is reserved for design teams whose consistency and innovative design work is very convincing. This is an honorary title that is not awarded in open competition and is only given to a particular design team once in a lifetime. In total, the 2008 competition has received more than 11,000 entries from 61 nations.
LENOX®, East Longmeadow, Mass., announces Lee “Hackman” Breton’s retirement from a 48-year career at LENOX.
Breton started at LENOX in 1962 on the manufacturing floor. During that time, Breton was credited with manufacturing the very first bi-metal reciprocating saw blade entirely by hand.
Lee’s career at LENOX made a dramatic change in 1981 when the sales team at LENOX asked him if he thought he could cut a car in half with the new HackmasterTM Hacksaw blades to show off their strength and durability. He accepted and met this challenge, which turned out to be the first of hundreds of car cuts—earning him the “Hackman” nickname. From that day forward, being Hackman became his full-time job. Over the years, Breton traveled the world as Hackman demonstrating LENOX Tools by cutting more than 500 cars and other items, including an oil tank truck, cargo plane, box car, house, armored car and even a bus at the 1999 Super Bowl.
Breton’s last day at LENOX was May 28, 2010.
In addition, LENOX® announces that effective immediately, Rich Wuerthele has been appointed president of industrial products and services of LENOX, a Newell Rubbermaid company.
Wuerthele joined Newell Rubbermaid in 2003 and most recently held the position of president of the North American Sales Organization. Under his leadership, the NASO team was distinguished with “Vendor of the Year” honors from numerous national customers. He last worked at LENOX as President of Industrial & Commercial Sales. In total, Wuerthele has more than 24 years of progressive sales, marketing and general management experience within the tools, hardware and industrial industries.
Saint-Gobain Technical Fabrics announces that its manufacturing unit in Midland, ON, Canada, has received the ISO 14001:2004 certification, the internationally recognized standard for environmental management systems.
The Technical Fabrics facility in Midland manufactures woven glass mesh for residential and commercial construction markets as well as other high-performance niche markets. The Midland location is one of five Saint-Gobain Technical Fabrics’ North American manufacturing plants that have undertaken the effort to obtain certification by the end of 2011.
Established by the International Organization for Standardization, ISO 14001:2004 specifies requirements for an environmental management tool used to achieve internal and external environmental goals. The certification process enables organizations to identify and control the environmental impact of its activities, products or services, improve its environmental performance continually, and implement a systematic approach for setting and achieving environmental objectives and targets.
Sto Corp., Atlanta, has created an agreement with specialty construction materials manufacturer ARDEX to expand concrete restoration and repair systems in the United States.
ARDEX develops, manufactures and markets specialty construction materials for substrate preparation, leveling floors, concrete repair, the fixing of natural stones, ceramic tiles and other surfacing materials as well as providing training and support services for their application.
In joining forces with Sto Corp., both companies will be able to expand their building and concrete restoration market by offering combined product sourcing while potentially expanding warranty terms giving customers a one-stop shop for building retrofit projects.
