Cement consumption has fallen by 53 million metric tons from its peak in 2005. Just under 30 million metric tons of that decline was in residential construction. And while demand could increase this year, there remain many unknowns—about jobs, foreclosures, buyer demand, and financing—that could also tamp down home building at least through the fall of this year.
“Builders are not going to start building again until they can get a decent return on investment,” said Ed Sullivan, chief economist for the Illinois-based Portland Cement Association (PCA), who gave his annual presentation about economic conditions at the International Builders Show (IBS) in Las Vegas on Tuesday. PCA projects a 14.4% increase in total housing starts in 2010, a 20% percent increase in single-family starts and a 5.7% decline in multifamily starts. These projections fall well below the consensus of construction economists’ expectations. And the industry won’t even hit those levels, Sullivan predicted, unless the inventory of unsold homes gets down to around a five-month supply, which in turn would help stabilize prices.
Sullivan, who in the past has been among the gloomier economists about the housing sector, laid out a number of scenarios that he believed would determine how quickly that sector turns around.
First and foremost, Sullivan asserted the employment picture must get better. He notes that over the past six months alone, the United States has lost 2.2 million jobs. While he conceded “the labor market is improving,” he doesn’t anticipate positive job creation numbers until the second half of 2010, at which point he expects the economic recovery to resemble what occurred after the recession of the early 1980s. Unemployment is a seminal barometer for the housing industry when 25% of mortgages are underwater, and homeowners are nervous enough about losing their jobs to walk away from houses they’ve paying more for than they are currently worth.
A second factor affecting the recovery will be what happens when the federal tax credit for home purchases expires on April 30. He pointed to NAHB estimates that attribute 380,000 home purchases in 2009 and 2010 to the tax credit. Sullivan estimated, however, that the tax credit simply changed the timing of two-thirds of those purchases, and did not expand the market as much as some industry watchers suggest. Sullivan wondered whether market conditions would be strong enough to sustain those sales without a tax credit. More likely, he sees the potential for a moderation of even a stalling of sales through the second half of the year.
A third factor is foreclosures, which jumped by 18% last year. Sullivan is keeping an eye on bank possessions, which in 2009 accounted for less than 20% of foreclosures. He fears that possessions could eventually brush up against 40% before they start to recede, which Sullivan said would only add to the inventory of unsold homes on the market. And as inventory mounts, prices depress, resulting in lower home builder returns.
Sullivan was also concerned about banks’ ongoing aversion to risk and the resultant tight lending standards. Home purchases will invariably be held in check if, as he expects, tight lending remains in place through the first quarter of 2011.
The one ray of light that Sullivan sees on the horizon is pent-up demand, which will eventually start driving construction and sales, but probably not until the third quarter of this year at the earliest.
John Caulfield is senior editor for BUILDER magazine.