Special Report: 2.2.2010

Posted by Joe Salimando on Friday, January 29, 2010

HOUSING REBOUND -- SOONER? OR LATER?

Why it makes a difference, even to you

By Joe Salimando

Embedded in all 2010 construction forecasts is the idea of a rebound in housing construction. It's not huge, because -- after all -- things fell horribly, so a bounce up from 2009 is not, relatively speaking, a boom. Neither is it a comprehensive bounce; almost every forecast sees a continued slump for multifamily housing (apartment buildings), even this year.

In the recent past, and for a while, the National Association of Home Builders has had its market "zeroed in," with what I believe to be the best forecasting record of anyone looking at new residential construction. Here's what David Crowe, the chief economist there, wrote in early January:

NAHB is forecasting just over 600,000 single-family starts in 2010, up from an estimated 440,000 starts in 2009. In a normal market, we would be constructing 1.5 million single-family starts on average yearly.

Although multifamily housing activity should stabilize and improve by the end of 2010, it will be slower than in 2009, with starts declining from an estimated 112,000 last year to an even lower 87,000.

Most construction forecasts from others are somewhere around the NAHB figure for single-family starts in 2010. It's a 30% gain from 2009, but compared to years previous, it still looks sickly.

What's more, I don't believe it is what is in the process of actually happening.

 

Matching Demand & Supply

Now, there are things we all should know, some basic assumptions about housing:

Residential construction isn't as important to most electrical distributors as nonresidential (which was covered last time).

But despite that relative lack of copper content, new residential construction IS pretty important to the national economy. It generates so much demand for other stuff.

We can count empty homes around the U.S., but we can't move them. So a nice, cheap dwelling in Detroit can't be relocated (probably) to where you want to live. Don't want to move to Detroit? That empty house, available for $35K, might as well be on Pluto.

AND: For housing, "demographics is destiny." Crowe, in the above-linked article, went back to the old reliable as follows: Based on demographics and other factors, an annual average of 1.8 million housing starts will be needed over the next 10 years and 2010 starts are not likely to provide even half of what is needed.

 

Statistics Straight Out Of A Depression

But wait. David Rosenberg, the Wall Street economist who left Merrill Lynch for Canada's Gluskin Sheff, penned a piece on 1/21 that included these bullets:

There are 2,00,000 U.S. homes sitting vacant with a "For Sale" sign.

There (are) another 3,400,000 homes that are vacant but are being "held off the market" for unspecified reasons. In other words, this "shadow" inventory of foreclosed units has yet to be listed.

There are an estimated additional 3,500,000 homes that are occupied but are listed for sale right now.

We have 235,000 newly built units sitting vacant, too.

There are a record 4,600,000 vacant rental units nationwide . . .

Do the math. OMIT, for the sake of argument, the "occupied but listed for sale right now" houses. Without those, there are 10,235,000 homes and rental units sitting empty right now, according to Rosenberg's stats.

So do some more math. Take the 1.8 million number from Crowe and multiply it by 10 years -- that's 18,000,000. Subtract 10,235,000 from it, and we're at 7,765,000 units "needed" (absent some important stuff right below). That works out to annual "demand" of fewer than 800,000 units per year, doesn't it?

[That's WRONG, of course -- all of the empty homes are not where they need to be; many of them might not be sellable even if they are in the right place; and so on.]

When I think about Rosenberg's numbers, I shrug off Crowe's demand projection. Does it seem likely that we're going to have a stupendous amount of houses and apartments empty for years and years, while we build new homes? I get a NO there.

 

Another Voice -- An Echo?

Reed Construction Data on 1/21 posted a piece headlined "U.S. inventory of unsold new homes isn't getting much better." Here's a slice of it that might need some careful reading:

The number of unsold single-family new homes is unbelievably low – only 231,000 units. It has dropped consistently from month to month for nearly three years. The problem is that there is still a large inventory of unsold existing homes. The overhang has proven to be persistent. These are the properties that are being sold by financial institutions at bargain prices. They result from both the sub-prime mortgage crisis and new credit problems in the prime mortgage arena.

Above, from www.reedconstructiondata.com: U.S. New homes sold.

Now, keep in mind that we've had a big ($8,000) tax credit for much of the time, available to first-time home buyers. When Congress extended that (to 4/30/10), it added a $6,500 credit for those who've already bought a home previously. Interest rates are low; FHA financing is available (you only have to put 3.5% down, and the loan limit is damn high, above $700K, in many places).

All of that is not helping? Seems incredible. But the Commerce Dept. reports that sales of newly built single-family homes fell in both November and December.

 

Joe's Take

I can't pretend to know how home builders think. They have appeared, over time, to take more on faith than most business owners/executives I've met. Additionally, we all know that all residential markets ARE local. There WILL be places where homes are built to satisfy REAL demand.

However, I can't muster the belief that home builders are going to construct a lot of stuff on spec in 2010. I believe they are aware of everything above, and more. Sure, you can't put the 10 million empty dwelling units on trucks and move them around; but those things ARE somewhere, aren't there? An don't forget that home builders are aware of competition -- those 3.4M occupied homes that are for sales add to the problem.

Do you believe the mass of small-, mid-sized, and large home builders are going to look at the Nov-Dec numbers, and everything else above, and run out and build a bunch of houses without buyers? I don't.

What does that suggest?

a. Home sales will be disappointing in 2010 (perhaps below the 2009 number). New home construction will be lackluster. As a result, the construction industry's performance will be below what has been forecast by the major seers. I think this is close to obvious, don't you?

b. If there is an economic "double dip" in 2010 -- as some seem worried about -- housing will be seen as evidence of it (whether that's true or not).

c. Without a housing bounce, there will not be the generation of momentum that such a thing would bring in the general economy. Right?

d. Housing true believers will look at the wreckage in mid-2010 or later and say -- it's OK, the demand will materialize in 2011 and 2012. It's pent-up demand! Maybe so. But the key is going to be absorption of the 13.7M total of empty dwelling units plus for-sale houses in the Rosenberg list above. I will have a tough time envisioning pent-up demand until that number is at least cut in half . . . won't you?

e. I can't see the Federal Reserve Board allowing interest rates to move up -- not one iota -- in an environment which features 13.7M houses for sale or empty, and 17.3% "real" unemployment in the U.S. Can you?

f. I can't see Congress avoiding the enactment of yet more stimulus-type legislation and programs. I can't see these people walking away from the home-buyer tax credits when they expire with April's final day. Not in this environment; not this Congress. Can you say "well then, we're going to have even bigger annual budget deficits in 2010-11-12 than anyone so far has projected?"

g. I especially can't see the Fed or Congress pulling back if the "double dip" story becomes the lead headline. Can you? What I see happening is a U.S. dollar worth maybe 60 yen and perhaps $1.80 to the euro.

Bottom line: If you liked 2009, you're going to love 2010. And somewhere off in the distance, 2011 is starting to take on a lean, haggard countenance, too.