US housing ‘double dip’ fears grow
By Alan Rappeport in New York and James Politi in Washington
Published: June 21 2010 18:50 | Last updated: June 21 2010 18:50
Steve Romeyn, a builder in the northern suburbs of Atlanta, Georgia, is feeling increasingly alone in his industry. “There are many, many builders who have gone out of business?.?.?.?a lot of them are working at Home Depot now,” says Mr Romeyn, managing partner at Windsong Properties in Woodstock, Georgia.
Fortunately for Mr Romeyn, his company has been somewhat insulated from the problems facing its rivals, as Windsong builds communities for adults over the age of 55, who tend to be more financially stable.
Windsong’s fortunes have also been helped by an $8,000 (€6,460, £5,400) tax credit for first-time homebuyers put in place last year and extended to the end of last April. Before the deadline, Mr Romeyn’s business benefited as retirees were able to sell their homes more easily, allowing them to move into his adult communities.
Now the tax credit has run out, that momentum has slowed dramatically. “In the last four weeks I’ve seen very weak traffic and weaker activity,” says Mr Romeyn. “It’s not encouraging and it means we’ll have to work even harder to convince people to move forward with their purchases.”
In May, new residential home construction in the US fell by 10 per cent to a seasonally adjusted rate of 593,000 units, its lowest level in five months, the commerce department said last week. Economists expected to see an impact from the ending of the tax credit, but not such a steep drop.
If the weakness continues, the likely conclusion will be that the tax credit brought forward demand from aspiring homeowners but failed to spur a more fundamental improvement in the housing market. The next big test will be new home sales data out on Tuesday. Economists fear the US housing market could be on the verge of a “double dip” – or even a “triple U”, given the fall in new construction over the winter.
“We are going to have a very sluggish time over the summer,” says Kevin Logan, chief US economist at HSBC in New York.
One of the biggest restraints on the housing sector is persistently high unemployment. With joblessness at 9.7 per cent, and expectations that it will improve only gradually over the course of this year and next, homeownership will remain an elusive goal for many Americans. This is particularly true given that credit conditions for home loans remain tight, with many buyers expected to pay at least 20 per cent in equity up front – a huge difference compared to the boom years when mortgages were easy to secure.
Meanwhile, home prices have continued to drop as many houses are being sold out of foreclosure or at distressed values. According to the widely followed Standard and Poor’s/Case-Shiller index, home prices across the US actually rose by 2 per cent over the year to March. However, they fell in the fourth quarter of last year by 1 per cent, and the pace of decline accelerated to 3.2 per cent in the first quarter of this year.
Mr Logan says falling prices remove one of the main motivations for people to buy a house, which is the chance to own a home that is also a good investment.
On the other hand, homes are becoming more affordable. Not only are prices falling but the average 30-year fixed rate mortgage has dropped close to historic lows. Last week it stood at 4.75 per cent compared with 5.38 per cent a year ago, according to Freddie Mac.
Even so, Michael Fratantoni, vice-president of research and economics at the Mortgage Bankers Association in Washington, believes the overall economic picture and sustained job creation are more important to housing demand than affordability. “No one is going to want to buy a home based on a temp job,” he says.
Back in the south, where the drop in housing starts was 20 per cent in May, the most of any region, the mood is grim. Chuck Fowke, a builder of luxury homes based in Tampa Bay and president of Florida’s homebuilders’ association, says of the tax credit expiration: “It brought people out prematurely and now we’re taking it on the chin.”
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