Federal Reserve Chairman Ben S. Bernanke may be about to get help in his attempt to boost the economy, from an industry at rock-bottom: housing.
Job growth, even with unemployment at 9.4 percent or higher since May 2009, and an increasing U.S. population mean home construction probably will improve in 2011 from its near-record low, said Charles Lieberman, chief investment officer at Advisors Capital Management LLC in Hasbrouck Heights, New Jersey. Mortgage rates are less than 5 percent, further supporting affordability.
A rise in homebuilding would increase jobs for construction workers and also for people in industries supplying the stoves and sinks that go into new homes. As housing shrank to the smallest share of the economy on record, 2.23 percent, job growth slowed. The economy added 39,000 jobs in November; 5,000 construction jobs were lost.
“The housing market is going to shock people,” said Lieberman, former head of monetary analysis at the Fed Bank of New York. “Once we get the ball rolling, it becomes easy to roll. The most critical thing the Fed can do, which is not easy, is to promote job growth. If we see job growth we are going to see a very strong housing market.”
Jobs will rise by an average of 200,000 a month next year, pushing the unemployment rate, 9.8 percent in November, down by almost one percentage point, he said.
At the Fed’s meeting to discuss monetary policy on Dec. 14, Bernanke and other members of the Federal Open Market Committee reviewed their $600 billion bond-purchase program. One hope for 2011 is that the Fed’s near-zero interest rates will finally be able to start reversing a half-decade slump in housing.
Residential investment’s share of the economy fell to 2.23 percent in the third quarter of 2010, the lowest since records began in 1946, from 6.3 percent in the fourth quarter of 2005, the highest in 55 years. That plunge has driven job losses in the construction industry: They fell to 5.6 million this year from 7.7 million in 2006.
Housing starts probably will reach a three-year high of 739,000 in 2011, creating enough jobs to shave half a percentage point off the unemployment Rate, said David Crowe, chief economist of the National Association of Home Builders in Washington.
“This is an ugly economic cycle,” he said in a telephone interview. “We need job creation to get people comfortable with buying a home. If they do that, we’ll create jobs that will reinforce that home buying and fuel additional job growth.” More building in 2011 will add almost 500,000 jobs, he said. The homebuilders’ association expects an unemployment rate of 9.1 percent by the end of 2011.
A bottom in the housing market would improve the prospects of companies in the Standard and Poor’s Midcap Homebuilding Index, which has declined 68 percent since its peak in July 2005. Douglas Yearley, the chief of index-member Toll Brothers Inc., said in a Dec. 8 interview at Bloomberg’s New York headquarters that the worst is over for housing.
“The recovery is here to stay,” said Yearley, whose company, based in Horsham, Pennsylvania, is the largest U.S. luxury-home builder. “I think 2011 will be an improving year, but I think 2012 will be a big year for us.”
The number of signed contracts to purchase Toll Brothers homes rose 6.3 percent in the 12 months ended in October, compared with a year earlier, the first gain since 2005, the company said in a Dec. 2 report.
The average price rose 6.1 percent to $565,079, the first increase since 2006. The builder’s shares are up 8 percent this month, compared with a 6.5 percent gain for the Standard & Poor’s 500 Index.
The S&P Homebuilders Exchange-Traded Fund, which includes Los Angeles-based KB Home and Fort Worth-based D.R. Horton Inc., has risen 13.3 percent since November 18, compared with 4.8 percent for the S&P 500 ETF.
Builders in the U.S. began work on 555,000 housing units in November at an annual rate, compared with the 477,000 units in April 2009 that was the lowest in census records dating to 1959.
Meanwhile, the U.S. population has continued to grow. Data from the 2010 census, released last week in Washington, show the population climbed to 308.7 million from 281.4 million in 2000, an average increase of 2.7 million a year.
The number of U.S. households, an indicator of real estate demand, probably will rise 0.7 percent to 118.7 million in 2011, the biggest annual gain since the beginning of the mortgage crisis in 2007, according to Patrick Newport, an economist with IHS Global Insight in Lexington, Massachusetts.
The lack of new housing starts has been “holding back the recovery, but arguably that drag is fading now that the financial system is recovering,” said James O’Sullivan, chief economist at MF Global Ltd. in New York. He expects a 12 percent increase in residential investment in 2011, along with job growth of 200,000 a month by June, as much as 225,000 a month by the second half and an unemployment rate of 8.8 percent by the fourth quarter.
Housing starts will probably improve from their current lows while remaining well below their long-term trend, he said. A key to that forecast is support from low interest rates, which boosted home-buying capacity to record levels in October.
Housing affordability, measured by the ease with which a family with median income can afford a median-priced home, reached a record of 184.2 in October, the highest index reading in more than two decades of data, according to the National Association of Realtors in Washington.
Home prices continued to decline. The S&P/Case-Shiller index of property values fell 0.8 percent from October 2009, the biggest year-over-year decline since December 2009, the group said Tuesday in New York. Eighteen of 20 cities showed a decrease in prices in October, led by a 2.1 percent drop in Atlanta, and declines of 1.8 percent in Chicago and Minneapolis.
Still, mortgage rates have shaken off the initial damping effect of the Fed’s purchase program, known as QE2 for the second round of quantitative easing. The average U.S. rate for a 30-year fixed mortgage rose to 4.81 percent during the week ended Dec. 23 from an all-time low of 4.17 percent in mid- November, according to Freddie Mac, the McLean, Virginia, mortgage buyer.
Pending sales of U.S. existing houses unexpectedly jumped by a record 10 percent in October, the Realtor group said earlier this month, indicating the industry may be stabilizing. Completed transactions in November rose 5.6 percent to 4.68 million at an annual pace, NAR said last week. Purchases of new houses rose 5.5 percent to a 290,000 annual rate in November, the Commerce Department said Dec. 23, less than the 300,000 median forecast by economists in a Bloomberg survey.
Robert Niblock, chairman and chief executive officer of Lowe’s Cos., the second-largest U.S. home-improvement retailer, and Ian McCarthy, CEO of Beazer Homes USA Inc., expressed qualified optimism for the housing outlook. Niblock said in a Nov. 15 earnings teleconference that “even in a difficult environment, we are seeing gradual improvement in the fundamentals of the housing market.”
Atlanta-based Beazer, a builder of entry homes, expects national single-family housing starts to increase in 2011, “likely in low double-digit percentages,” McCarthy said in a Nov. 5 earnings call.
The diminished share of the economy for building new homes means that improvement from record lows won’t boost growth as much as in the past, said Paul Dales, U.S. economist for Capital Economics Ltd. in Toronto. He agreed that residential investment is poised to be a modest boost to gross domestic product.
“Previously if you had a 10 percent increase it boosted GDP by 0.6 percentage points,” Dales said. “Now, if it climbs 10 percent that’s a 0.2 percent boost. Housing starts are really at rock bottom. They’re not going to be a drag on growth.”
In October, 1.4 million construction workers were unemployed with only 46,000 job openings, a ratio of 31 workers for every available job, according to Labor Department data.
The Fed has completed $155.7 billion of its intended $600 billion in purchases. The central bank is also reinvesting proceeds from its holdings of maturing housing debt.
Its decision to begin a second round of asset purchases sparked a political backlash in Washington, with Republican lawmakers criticizing the move as likely to be inflationary. Indiana Representative Mike Pence and Tennessee Senator Bob Corker have proposed eliminating the Fed’s dual mandate for full employment and price stability, and have the central bank focus only on stable prices.
Can’t Get Weaker
Bernanke appeared on CBS Television’s “60 Minutes” on Dec. 5 to address critics, saying he was “one hundred percent” confident the central bank could control inflation.
Asked about his outlook for the economy, Bernanke said a return to recession wasn’t likely, adding “that’s because, among other things, some of the most cyclical parts of the economy, like housing, for example, are already very weak. And they can’t get much weaker.”
Fed policy makers weren’t optimistic about the housing outlook at their Nov. 2-3 meeting, citing the elevated supply due to foreclosures. Some “saw disputes over mortgage and foreclosure documents as likely to delay the eventual recovery in housing markets,” according to the minutes of that meeting.
“Residential investment has failed to make a positive contribution to growth in this recovery,” said Richmond Fed President Jeffrey Lacker in a Dec. 6 speech in Charlotte, North Carolina.
‘Legacy of Overbuilding’
“This contrasts with the two other severe recessions of the past 60 years, in which residential investment increased an average of 40 percent in the first year of the recovery,” he said. “Given the significant legacy of overbuilding, unique to this recession, I do not expect housing to contribute significantly to growth over the next two years.”
An elevated rate of foreclosure may not derail a rebound in housing, said Lieberman of Advisors Capital. The firm managed $55.7 million of U.S. stocks as of Sept. 30, including real estate investment trusts Sun Communities Inc. and Colonial Properties Trust, according to Securities and Exchange Commission filings.
Foreclosures are “half the story,” said Lieberman, because people who lose their homes must find residences elsewhere. “They neither disappear nor move to Mars. They take another rental off the market.”
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