Is the housing recovery starting to lose steam?

on April 23, 2013

There is some very interesting news coming out regarding the housing market. Depending on who you listen to, there is wild optimism or some strong concern regarding whether current housing growth will continue. The housing market is a major factor in the demand for wood products such as higher grade lumber and some panel. The strong housing market combined with other factors such as demand from China, natural forest issues and the wood industry being cautious in adding capacity has led to lumber prices reaching record levels at the beginning of spring 2013. In previous blogs Packnet has reported how these trends are affecting prices from its own suppliers.
If the housing market gets stronger and really takes off like some optimistic economists are predicting, then the lumber price issue will get worse. On the other hand, if the housing market cools off as some predict, we could see some stabilization in pricing.
So here are 5 reasons that housing recovery will continue and even grow and 5 reasons that it may ebb later in 2013.
Why new housing construction will boom
1. Housing prices have had their strongest increase in several years, many home owners who were underwater are starting to see the light at the end of the tunnel. As more home owners get in a situation where they can afford to sell, more buyers enter the market and economic activity will pick up.
2. Inventory is tight in relationship to demand, even though the new housing starts have increased over the last few years, there still is a short supply of housing on the market. This should help push the demand for new home construction.
3. Interest rates are still low, but many are predicting interest rates to go up, while higher interests rates could slow demand, there may be some psychology coming into play where people are going to jump in before interest rate increase, creating a mini boom over the next few months.
4. While housing starts have been strong over the last few months, they are still less than ½ of what there were in 2004. Looking at historical numbers over the last 25 years, housing starts need to increase significantly to get back to the normal curve.
5. So far none of the big “doom and gloom” projections that were predicted for the beginning of 2013 have come true. The increase in FICA tax, the economic woes in Europe, the pending economic collapse of China were among a long list of warnings economists were giving out near the end of 2012. While any one or more of these dire warnings could still put our economy back in a recession, the fact that we made it this far into 2013 unscathed is generating a bit more confidence.
Why New Housing construction will weaken
1. The economy has been stalling in April, unemployment has up ticked a bit, growth rate is miniscule and a slower economy could dampen the new construction pace significantly.
2. A significant part of the housing growth has been driven by investors who were buying up foreclosed properties at bargain basement prices and holding on to them to sell at a big profit. This type of demand has always been a little shaky, sometimes a couple bumps in the road can cause investors to get cold feet and start dumping property, which could easily start pushing prices down again. Once that happens, more home owners will be back “underwater” with their mortgage and prevent them from coming back into the market.
3. Builder confidence has taken a pretty sharp drop lately, after peaking in December with a score of 47; it is now down to 42, builders tend to react to how many new customers are calling them rather than the number of houses they have in progress.
4. Congress has passes some fairly steep cuts in the federal budget, these budget cuts may further slow the economy down and dampen housing growth.
5. While interest rates are near historical low levels, banks are being tight now in approving new mortgages, this is believed to already be throttling the housing market.
Though there is a chance of a downturn this year, we believe that over the long term, housing starts will get back on track and align with historical trends. That means more houses built and higher prices down the road.