Due to Lack of [Consumer] Interest, the Recovery Has Been Postponed

Rich Walker
August 1, 2011
COLUMN : Industry Watch | Markets & Trends

Though the overall economy has been officially out of recession for two years, it grew at an anemic 1.8 percent annual rate in the first quarter, down from 3.1 percent in the fourth quarter of 2010; and all segments are not recovering equally. The stars are aligned for a housing recovery, but economic clouds are hindering navigation. Yet, it remains a question of when, not if.

“The spring of 2011, when we were supposed to see a housing recovery, has been postponed," says Susan Wachter, real estate professor at the University of Pennsylvania’s Wharton School. 

While housing starts have been inching upward each year since the precipitous decline of 2007, single-family starts fell 5.1 percent in April, falling 4.6 percent below the first quarter average, according to the Chapman University Economic Forecast. Housing starts have been “bouncing along the bottom” in this fashion since June of 2010.

There continues to be a downward pressure on home prices due to foreclosures, although the rate of foreclosure is at its lowest level since late 2008. The Standard & Poor's Case-Shiller Home Price Index seemed to hit bottom in March of 2009, then experienced a slow rise. But it reversed course last July and has since declined to new lows. Meanwhile, high unemployment rates remain a key factor.

Interestingly enough, low prices are a two-edged sword. Combined with low interest rates, they mean almost record affordability; but they also mean that millions of owners are stuck in homes worth less than they owe on their mortgages. Tighter lending standards are locking people out of the housing market, Wachter notes.

The Remodeling Dark Horse
Because many potential homebuyers are leery about the job market, their finances and being trapped in undervalued homes, they are turning to remodeling their existing homes and staying put. Harvard’s Joint Center for Housing Studies predicts that remodeling expenditures will increase at an inflation-adjusted 3.5 percent average annual rate, an opportunity that is spurring many new-construction contractors to enter the remodeling market.

The Employment Picture
If housing recovery depends heavily on job prospects, the outlook is again mixed. For example, on June 3, the Labor Department reported that only 54,000 jobs had been created in May, compared to about 220,000 in each of the preceding three months. While manufacturers project an employment increase of 2.9 percent for the rest of this year, some observers point to a “structural” unemployment problem–people who do not have the education or the skills for the positions available. And, ironically, a weakened housing market and sub-par appraisals are reducing the mobility of job seekers to take advantage of new opportunities.

This is just one of the countless legitimate worries for consumers, who traditionally account for about 70 percent of economic activity in the U.S.
The Conference Board Consumer Confidence Index, which continues to slip downward in a sawtooth pattern, reflects the general mood of uncertainty. The index stood at 60.8 in May (1985=100), down from 66.0 in April, 63.4 in March and 72.2 in February.

An Economic Wild Card
Spring storms in the Midwest produced historic levels of damage and losses from severe weather, especially tornadoes. The toll so far: 523 fatalities, with estimates of the damage ranging from $10 to $16 billion to replace or repair the approximately 17,000 buildings destroyed or damaged. These losses obviously have short-term negative impact, but they also create a catalyst for renewal.

Historically, disasters have been accompanied by a burst of new economic activity as rebuilding gears up. As a result, analysts predict that any loss of economic output in the April-June period will likely be reversed in the July-September quarter.

In Sum…
The JCHS notes: “The ingredients for a sustained recovery may be coming together, but it is still not clear when homebuyers will have the urgency to return to the market.” The economic roller-coaster ride outlined by the statistics and differing expert opinion is enough to give business planners whiplash.

“By the end of 2012, I see us back to where we were in mid-2008—not great, but decent,” adds David Crow, economist for the National Association of Home Buiders. But, Wharton’s Wachter doesn't expect any significant improvement before the end of 2013.  So while the jury is still out on the timing of a solid recovery, all indications are that it’s on the way.

Rich Walker is president and CEO of the American Architectural Manufacturers Association, 847/303-5664, rwalker@aamanet.org.