This is a post from Jim Haughey's blog that covers the US construction industry.

Jim Haughey is the Chief Economist for Reed Construction Data and has over thirty years experience as a business economist, including twenty years monitoring the construction market. He has a Ph.D. degree in economics from the University of Michigan and has previously taught at the University of Michigan, Ohio University, Michigan State University and the University of Massachusetts.

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Construction Industry Forecasts

Notes from Jim Haughey - May 17, 2011

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Housing starts drop 11% in April; single family outlook worsens
Jim Haughey, RCD Chief Economist

Apartment demand is improving quickly with a lag of a few months after employment increases. People who get jobs or an improvement in their income can quickly decouple from their family or friends. This has been happening for long enough to push the surplus of apartments significantly lower and set off a modest rise in rental rates. Real estate investors noticed this last fall and have ramped up building. The long term demographics are also favorable to apartment demand with the 24-35 age cohort expected to rise as a share of the total population through 2015.

The single family market usually recovers well before now in an economic recovery but the recovery is being stalled by unique factors in this expansion. Compared to previous housing recoveries, first time homebuyers face demands for larger down payments, higher interest rates (no more teaser rate or interest only mortgages are available), higher mortgage insurance premiums, a higher credit score, bank appraisals below market value and a more careful review of their income. Current homeowners face all of these problems plus reduced home equity and expectations for continued declines in home values. Also, 28% of homeowners with mortgages are underwater and blocked from selling.

The government is also a major restraint on the single family housing recovery with the restraint likely to worsen soon. The huge variety of programs to keep people in homes that they can not afford has drained capital from mortgage lenders mortgage investors and mortgage servicers making them less able and less willing to finance a single family housing expansion. Instead, lenders are redirecting their resources to the less regulated, less risky and more profitable apartment and commercial markets.

Two more government raids on mortgage financing capital are being prepared and may take effect within weeks.  The new consumer finance agency proposes to require loan originators to retain 5% equity in new mortgages except for “qualified residential mortgages” which have a 20% or higher down payment. 39% of mortgage loans last year had less than a 20% down payment.  The new rules would make this large class of homebuyers less attractive to lenders.  Implementing the new rule would force lenders to raise substantially more capital which would increase their borrowing cost and thus also raise mortgage rates. The 20% down rule may be needed to restore normal default rates in the mortgage market but it will delay the housing recovery.

The second pending hit to the mortgage restraint is a collective effort by 50 state attorney generals to force mortgage services to accept a more expensive process to handle mortgage foreclosure paperwork and to donate as much as $20 billion to a fund managed by the attorney generals to recompense people who defaulted on their mortgages and cut the monthly payment of people in the foreclosure process. These costs would ultimately be borne by those who provide mortgages. This end run avoiding the courts and the Congress would cause another stall in processing mortgage foreclosures which would provide a temporary boost to new single family home sales at the expense of stretching out the time it takes for market to recover.

 


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Read Other Recent Jim Haughey Posts

08/15 - Contractor Survey: Work backlog rises in 2nd Q but may fall in the summer
08/09 - Modest construction recovery will be supported by two more years of cheap credit
07/29 - Sour economic growth report threatens construction recovery
07/27 - Worry about the deficit not the debt limit
07/27 - Worry about the deficit not the debt limit
07/27 - Worry about the deficit not the debt limit
07/19 - Housing starts rebound.6% in June after two weak months
07/18 - Congress prepares to postpone resolving the deficit crisis assuring an extended period of subpar eco
07/12 - House Transportation Committee proposes to keep federal highway funding at fuel tax receipt level
07/09 - Don’t count on debt limit deal to restart sustained high economic growth
07/08 - Contractors cut 9,000 jobs in June
07/05 - The cost and frustration of selling a home contributes to the delayed housing recovery
07/05 - May construction spending down 0.6%; recovery still on hold
07/01 - FAA stops works on federally funded runway and control tower projects
06/21 - It is not more jobs that will quicken the economic recovery
06/16 - Mays’ 3.5% gain in housing starts does not signal a housing recovery immediately ahead
06/15 - Cautious spending threatens to delay construction recovery
06/10 - Economic and construction recoveries will be subpar for at least another year
06/09 - NYC construction unions may agree to drop expensive work rules to spur more work
06/04 - Contractors add 2,000 jobs in May; overall job gain disappointingly low

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