Engineering, Construction & Real Estate

Residential construction: Life after recession

After a long and deep slump, the homebuilding industry is showing signs of a tentative recovery. The impact of the housing market collapse in 2007 is likely to continue haunting the segment until next year, and a return to growth is anticipated in 2011.

The size of the U.S. homebuilding industry was $259.7 billion in 2008. It grew at a compound annual growth rate (CAGR) of -10.6% for the period 2004-2008. In the same period, the European and Asia-Pacific industries recorded a CAGR of 14.2% as well as 20%, and reached $1,165 billion and $3,683 billion respectively.

During 2004-08, the production volume for the U.S. housing industry plunged 11.7% (CAGR) to reach 1.1 million units in 2008. This figure is expected to fall further to 990,000 by the end of 2013, representing a CAGR of -2.4% for the period 2008-2013. Also, the industry’s revenue is likely to drop at a rate of 6.9% (CAGR) to $181.4 billion in 2013.

In the near term, the process of clearing the excess inventory may delay new construction. Over the long run, various demographic factors may come into play and boost demand. First, the continued inflow of immigrants may increase the size of the labor force and generate demand for new housing. Second, the age group of 25-34 may see above- average growth in the population. Since the majority of the first-time home buyers belong to this age group, the higher growth in this segment of the population may drive home sales. Third, population growth in the age bracket of 55-64 may help to prop up sales of vacation homes. The impact of all these factors may be offset to a great extent if mortgage lenders set stricter lending requirements, restricting the number of potential purchasers.

To revive the housing sector, the U.S. government has introduced a program under which first-time home buyers are given a tax credit of 10% of the purchase price of a home or a maximum credit of $8,000. This program is due to expire on November 30, but builders and real estate agents are pressing Congress to extend the tax credit warning that if the program is not extended sales could slump again.

Moreover, the Federal Open Market Committee, the policy-making arm of the Federal Reserve System left the target range for the federal funds rate unchanged at 0-0.25% and reiterated that it would keep rates low “for an extended period.” The Fed went further to say that it will buy a total of $1.25 trillion of agency mortgage-backed securities while extending the end-date of the repurchase program by three months.

The measures undertaken, particularly the tax credit program, has helped drive up sales in recent months. According to the National Association of Realtors, existing home sales including single-family, townhomes, condominiums, and co-ops shot up to a two year high in September. Sales figures show a 9.4% rise over August and a seasonally adjusted level of 5.57 million units. This rise is mainly attributed to people’s willingness to take advantage of the government’s tax credit program before it expires in November. According to an association survey, first-time buyers accounted for nearly half of the market last year, a historically high level. Housing industry groups including builders, lenders, and agents are lobbying to have the credit enhanced and extended through at least summer 2010.

Unlike existing home sales, new home sales dropped unexpectedly in September as the impact of the tax credit program started to wane. The Commerce Department announced that sales dropped 3.6% from a revised figure of 417,000 in August to a seasonally adjusted annual rate of 402,000 in September. The National Association of Realtors announced that its seasonally adjusted index of sales contracts signed during the month for previously occupied homes rose 6.1% to 110.0 in September, the eighth straight month of a rise.

Across the country, new-home sales and permits for single-family homes were down in September. Multifamily housing constructionalso declined as property ownerschose to rent rather than sell, increasing the supply in the rental market. The Real Estate industry in 2009 expects to see continued inflow of investment capital into the U.S. as Sovereign Wealth Funds (SWFs) and other private investors take advantage of relatively inexpensive U.S. real estate opportunities. At the same time, U.S. real estate companies with healthy balance sheets are likely to continue expanding their international investments although some of them may focus on domestic properties which carry less risk.

“The excess supply of unsold homes has declined a lot and this reduces the downward pressure on home prices. An improvement in house prices is an important condition for an increase in housing wealth and therefore higher willingness of households to start spending again.”

Harm Bandholz, at New York's UniCredit Global Research