Rapid recovery not expected for national, local housing markets

When it comes to hoping the national and local housing sector makes a strong recovery, well, don’t get your hopes up — and that’s the opinion of a self-appointed “raging optimist.”

The closely watched Fitch “Chalk Line” quarterly report on the national housing sector suggests that the recovery in the housing sector “may be more muted than the average.” In the past five housing market cycles since 1960, the recovery was marked with a “sharp upward thrust in demand.” That’s not likely to happen on this cycle, Fitch asserts.

“As noted earlier, Fitch expects the housing weakness to persist through most, if not all,
of 2009, despite recent government initiatives. Should the current severe recession
continue unabated through 2009, then the downturn could extend another year beyond
our current forecast,” Fitch noted in its quarterly report.

Dave Hughes, executive director of the Greater Fort Smith Association of Home Builders and a person who has watched the local market for almost 25 years, said housing construction in the Fort Smith region has remained “fairly constant” but is not likely to see big gains in the near future.

“I see a weak recovery beginning now and continuing through the end of 2009, maybe generating up to a 3% increase in single family housing permits in Fort Smith. I’m the raging optimist with that prediction,” Hughes said.

Hughes said the area market is price sensitive. Homes priced under $150,000 are moving well, but “as you advance up the price scale, the air becomes thinner and sales are slower.” He said the Van Buren market continues to be weak but said recent home permit activity may suggest improvement.

A telling set of figures were the Fitch documentation of total U.S. construction expenditure in recent years. In 2002, the expenditures were up 0.9% over 2001. In 2003, they were up 5%; up 11.2% in 2004; up 11.2% in 2005; up just 5.9% in 2006; down 1.4% in 2007; down 6.8% in 2009; and down 11.7% during the first quarter of 2009.

“I wish the nations housing picture was in as good a shape as our area appears to be.  There are areas that have suffered severe devaluation, foreclosures, and no prospects for improvement,” Hughes noted in an e-mail interview with The City Wire. “Our area didn’t became intoxicated by the prospect of unlimited growth, throw-a-way credit, and endless market demand, therefore our housing market, while somewhat diminished, has not suffered the severe devaluation and inventory glut of those who, as my grandma would say, ‘became a little cocky.’”

Fitch included the positive and negative signs for the housing sector in its report.

POSITIVES
• Pent-up demand for new homes has been building for the past few years while home
prices have been sharply declining.

• Standard measures of affordability are near record highs.

• Primary homebuyers are more visible, with this year’s spring selling season notably stronger than the winter months preceding it.

• Seasonally adjusted new home sales and single-family housing starts appear to have stabilized in recent months (albeit at very low levels).

• Inventories of new homes continue to steadily decrease and are now 49% below the 2006 peak.

• The general economy is showing some recent evidence that the freefall has ended as
new claims for unemployment benefits have declined from April highs.

• New orders for durable goods and orders for capital goods (excluding defense and aircraft) improved in May.

NEGATIVES
• Mortgage delinquency rates are rising.

• Bank and government foreclosure moratoria ended in the first quarter of 2009.

• Foreclosures continue to reach new record levels, despite government mediation efforts as the weak economy and job losses now fuel the surge.

• Existing home inventories remain quite high (especially for vacant for-sale homes).

• Mortgage rates have risen 42 basis points from the low point earlier this year, and credit qualification standards for home purchases remain very tight.

• With the tightening of regulations, home appraisals are more challenging.

• Monthly job losses continue to be substantial.

• The president’s initiative to keep people in their homes through mortgage refinancing
and modification is clearly not working up to its potential. Lenders have been slow or
reluctant to cooperate. In any case, data suggests even after modifications (including a
reduction in the principal amount owed) a sizeable minority of homeowners default
again.

OTHER FACTORS
The 130-plus page quarterly report noted several factors that could extend the housing recession and/or further mute its recovery.

“Should the current severe recession continue unabated through 2009, then the downturn could extend another year beyond our current forecast. Further meaningful declines in housing metrics could occur, partially because delinquencies and mortgage defaults (which at present continue to rise) could spike further upward and then continue at substantial levels throughout 2009,” Fitch noted in the report.

The debt of American consumers, even with improved savings rates in recent months, continues to concern the Fitch analysts. They note that total household credit market debt as a percentage of disposable personal income rose from 83.4% in 1990 to 127.9% in the fourth quarter of 2008.

Fitch also reported that the ratio of consumer credit outstanding as a percentage of disposable personal income was 16.40% in 1980, 18.47% by 1990 and 23.28% in 2000. It was 23.99% in 2006 and 24.38% in 2007. The ratio was 23.28% in the first quarter of 2009.

The obvious concern is that it will take several months, if not years, for consumer debt to return to more normal levels. As a result, the normalization period will include fewer people willing or able to afford new homes.

Hughes looked briefly beyond the numbers to include market philosophy in his opinion of present and future market conditions.

“Lets encourage our political leaders to become less involved in our daily existence, let the free market work, warts and all, and I believe our housing economy will once again flourish as will our nation,” he said.