Leaning Against the Recovery Consensus Wind
Housing sector – slow in 2010, “dynamic” in 2011, according to PCA
By John Latta
The ugly home building market is finally weakening its death grip on the struggling economy.
A reviving residential construction sector will of course help the other construction sectors begin to recover too. But when?
The Portland Cement Association (PCA) believes the residential sector’s adverse impact on cement consumption has run its course, but unlike other major pundits, sees only a tepid increase in residential construction activity during the latter half of this year. More substantive gains, says PCA, will not come until 2011 and beyond.
The prediction comes from PCA’s chief economist Ed Sullivan, one of the construction sector’s best seers. The confident Sullivan concedes he is out of kilter with other organizations that are well-versed in the history and data of residential construction. PCA projects a 14.4 percent jump in housing starts this year. That sounds like a reasonable number but it reflects an increase over miserable 2009 levels. The increase will come, he predicts, from a 20 percent increase in single family starts and a 5.7 decline in multifamily home starts.
“These projections lie well below the consensus of construction economists’ expectations,” concedes Sullivan.
The National Association of Homebuilders (NAHB)sees a 25.6 increase, 2010 over 2009, in total housing starts, the National Association of Realtors (NAR) predicts a 37.3 percent increase and the Mortgage Bankers Association (MBA) foresees a 33.4 percent lift, according to PCA.
“At issue is the timing of the recovery. PCA continues to believe that several significant hindrances specific to the housing sector will remain in play throughout 2010 leading to a delay and more muted improvement in the residential sector compared to the consensus national averages.
“In our view, it is likely that 2011 will be characterized by a dynamic recovery in residential,” says Sullivan. “Upon review of the structural factors that will bring about a strong recovery in housing there may be reason to lean against the wind of consensus.”
In fact PCA is way ahead of all but one prediction from the other groups already cited when it comes to 2011 starts. PCA sees total housing starts for 2011 at 48.4 percent higher than this year. The NAHB prediction is 49.4 percent, NAR 40.0 percent and MBA 38.0 percent, according to PCA.
A decent jump in housing starts won’t happen until two critical conditions are met, says Sullivan. We need an inventory of unsold new homes that is no more than a five month supply, and we need stable or rising prices. And, he says, we have neither. There’s an almost 8 month inventory and prices are in the tank. And change isn’t coming soon, he says, because of our present lingering malady of “weak economic growth, high unemployment, likely increases in foreclosure activity, fire sale pricing of bank possessed properties, which acts as a depressant on new home pricing, and the continuation of tight lending standards.”
The question to answer then, is just when future conditions will have changed to the point where we can expect a significant acceleration? There are, says Sullivan, six key factors to consider when trying to figure out the answer.
One: Weak labor markets will hinder a significant and sustained increase in 2010 new home building.
“Stabilization of labor markets is the critical ingredient that eventually leads to an improvement in the underlying fundamentals for residential activity,” says Sullivan. “Without a sustained improvement in labor market conditions, it is unlikely that any notable increase in sales activity will materialize.” PCA sees job losses stopping this quarter, followed by an even period then, early in the third quarter, the beginning of a series of steady quarterly improvements.
Two: Homebuyer tax credits may result in a payback in sales during the second half of 2010, moderating perceived momentum.
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