Date: 2009-06-09
By Kim Kennedy
Single family housing should reach bottom late in
2009.
Although this year's economy is likely to remain depressed,
small signs are beginning to emerge that suggest the recovery,
while not yet blooming, has begun to take root. These signs are
appearing in the housing market, in the credit markets as well
as on Main Street. At the same time, continued declines in
employment and rock-bottom levels of consumer confidence are
likely to remain a dark reminder of the severity of the current
downturn.
According to the National Association of Home Builders, the
housing market, which was the trigger for the current economic
crisis, must see a turnaround before the overall economy begins
to improve. Fortunately, several efforts to encourage
homeownership and stem foreclosures should help single family
housing reach bottom late in 2009. The federal stimulus bill
includes an $8,000 tax credit for first-time homebuyers who
purchase homes between Jan. 1, 2009, and Dec. 1, 2009.
In addition, the Obama administration's housing rescue plan
should help to reduce the number of foreclosures through its
loan modification program. Under this program, loan servicers
will reduce interest rates (and principal if necessary) so a
family's monthly mortgage obligation is no more than 31 percent
of its pre-tax income. Although single family housing starts
will continue to fall in 2009, these and other programs
designed to solidify the housing market should ensure that this
year is the bottom of the cycle.
The stimulus funding will provide a great deal of
short-term support to the economy.
Another factor that has brought the economy to a standstill
is the credit crisis. Lending standards stiffened significantly
in early 2008 when 80 percent of bank lending officers
indicated that they had
tightened standards on commercial real estate
loans
. That's a marked jump from earlier quarters. In the third
quarter of 2008, 87 percent of lending officers reported
tighter conditions, a record level. But by the second quarter
of 2009, lenders became much less restrictive as just 66
percent of loan officers reported tighter standards. Still,
with the level remaining historically high, it's clear that
last fall's financial rescue package fell short of its desired
impact.
Fortunately, the Federal Reserve and the Obama
administration have taken further actions in 2009 to facilitate
the flow of credit. To boost housing, the Federal Reserve began
purchasing debt obligations held by the federal housing
agencies and is on track to buy $100 billion and $600 billion
in mortgage-backed securities by June. In addition to
increasing the available supply of funds for mortgages, these
efforts have begun to reduce mortgage interest rates as well.
Mortgage rates declined to 5 percent in March compared to 6.1
percent in November and 6.5 percent last July. Lower interest
rates have encouraged an increase in loan refinancing that
should put more money in homeowners' pockets, which could lead
to increased spending. Moreover, in combination with first-time
homebuyer credits and lower home prices, these low mortgage
rates should encourage more buyers to enter the
marketplace.
The most immediate help to the economy, of course, is coming
from the federal stimulus bill. The goal of the American
Recovery and Reinvestment Act of 2009 is to create or save at
least 3.5 million jobs by the end of 2010. Of the $787 billion
price tag, about $130 billion is included for construction.
Although most of the construction-related funds were devoted to
the transportation sector, the stimulus efforts will aid the
entire economy by putting people back to work and a paycheck in
their pockets.
Of course, while stimulus funding will provide a great deal
of short-term support to this beleaguered economy, a more
sustained recovery will require a healthier banking sector. The
steps taken in the early months of 2009 will take some time to
implement but the effects should be discernable by the end of
this year. The springtime may bring hope but delivering results
takes time and effort.
Kim Kennedy has more than 25 years of professional
experience in construction economics, macroeconomics, consumer
and labor economics. She writes construction outlook articles
in several industry publications and is a frequent spokesperson
for the construction outlook at industry gatherings and
association meetings.
Updated: Jun 09, 2009
This article appeared in FDM, June 2009. ©Copyright 2012, All Rights Reserved.