Obstacles Slow New Home Sector's Recovery

New home building is getting a boost from cheaper lumber prices, but the industry still has some hurdles to clear before it can really crank up the assembly line.

Housing starts declined 9.9 percent from May to June, but were up 10.4 percent for the year ending in June, according to a joint release from the U.S. Department of Housing and Urban Development (HUD) and the U.S. Department of Commerce.
Actual housing completions rose 6.3 percent month-to-month ending in June and were up 20.2 on the year ending in June, the federal agencies reported.

Sales of new single-family homes rose 2.1 percent from April to May and in May were 29 percent ahead of sales in May 2012.

The median sales price of homes sold in May 2013 was $263,900, up 10.3 percent from $239,200 in May 2013.

The 10.3 percent increase in new home prices was off existing home's 13.5 percent annual increase in June and the 15.4 percent annual increase in May, according to the National Association of Home Builders.

Builder confidence at a nearly 10 percent drop in May to June housing starts doesn't jibe with National Association of Home Builders' data revealing growing optimism among builders. The builder confidence index rose for the third consecutive month in July to it's strongest level since January 2006.

The optimism stems, in part, from the 25 percent decline in lumber prices, over the past two months, according to analysis by Capital Economics.

The improving economy, buyers motivated by rising prices and interest rates, and growing sales also contributed to greater confidence among builders.

However, it could take months before lower lumber prices and builder optimism trickles down to housing completion levels that remain well off boom levels and short of market demand.

Material costs, shortages
Builders welcome cheaper wood, but the primary building material remains 54 per cent above housing-bust lows and 89 percent of housing boom-peaks, according to the National Association of Home Builders (NAHB).

Shortages of building materials also remain.
Builders say the highest incidence of shortages was reported for oriented strand board (OSB), with 22 percent of builders reporting shortages; gypsum wallboard, 20 percent; and framing lumber and plywood, both 18 percent.

Labor shortages
Labor shortages also continue to plague the industry.
During the housing peak, the economy supported nearly 3.27 million "key tradesmen and construction managers." By 2012, that number had dropped to less than 2.45 million, according to Fitch Ratings' recent summer 2013 special report, "U.S. Homebuilding/Construction: The Chalk Line."

"Although there were many fewer employed in all the trades, the decline was especially pronounced for carpenters and operating engineers and other construction equipment operators - both off 50 percent from 2007 peak levels to 2011. These trades are still off 25 percent from 2007 levels," Fitch reports.
During the housing recessions, many of those workers left the industry for the oil and gas fracking industries, self-employment and other industries demanding their skills.

Higher mortgage rates
Also higher mortgage rates could begin to cut into sales. Mortgage applications decreased 2.6 percent the week ending July 12, compared to the previous week.
Most of that was flight from refinancing, but mortgages for home purchases are also flattening, according to the Mortgage Bankers Association.

The Refinance Index decreased 4 percent the week ending July 12, compared to the previous week and is at its lowest level since July 2011. The Purchase Index increased 1 percent from one week earlier.

Capital Economics puts it bluntly, "The bottom line is that the construction recovery is nowhere near ended. The building permits numbers point to a decent gain in housing starts in June. And with starts still well below historically normal levels, home building volumes will keep rising for some time after that."

Published: July 25, 2013
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