PCA Economist Sees Tepid 2010 Housing Recovery

Portland Cement Association Chief Economist Edward Sullivan

Despite recent data suggesting increased sales activity, foreclosure improvement and inventory reduction, the environment for a sustained improvement in single-family starts activity may not be as positive as it seems, according to Portland Cement Association (PCA) Chief Economist Ed Sullivan.
Sullivan presented his view of the housing recovery at a press conference held Tues., Jan. 18th at the opening of the International Builders’ Show. View PCA Economic Analysis
“Currently, with housing prices fluctuating and new foreclosures coming on the market every month, homebuilders have no guarantee of an adequate return on investment,” Sullivan said. “And there is little to suggest that this will change in the near future.”
Sullivan challenged the optimistic views of the National Association of Realtors, the Mortgage Bankers Association and the National Association of Home Builders saying that the magnitude and timing of the recovery will fall short of what those groups suggest.
“Were seeing a 20 percent gain this year where others are looking at a 30 to 40 percent gain,” Sullivan said adding that in large part the recovery hinges on what happens in the labor market.
PCA’s fall forecast projects a 14.4% increase in housing starts during 2010 compared to extremely depressed 2009 levels. This reflects a 20% increase in single-family starts and a 5.7% decline in multifamily starts compared to 2009 levels. These projections lie well below the consensus of other real estate economists’ expectations.
Sullivan says that homebuilders are unlikely to accelerate construction activity until two critical conditions are met: first, low levels in inventory of unsold new homes reflecting no higher than five months supply; and second, stable or rising home prices.
“Both conditions are likely to be required to insure an adequate return on investment for homebuilders to spur an increase in building activity. Lacking either condition a substantive recovery in home building will not materialize,” Sullivan said.
Sullivan said federal tax credit programs artificially inflated the recent improvement in home sales and there’s the potential for a significant sales payback during the second half of 2010. Additionally, slow job growth is expected to hinder housing sales during the second half of 2010 and banks will continue to make it difficult for both consumers and builders to borrow for real estate.
Banks are currently in a “risk aversion” mode, Sullivan said, which will lead to continued tight lending standards that won’t let up until solid price stabilization returns to housing.
However, Sullivan sees a substantial pent-up consumer demand for housing is lurking in the future as new home inventories have not kept pace with the pace of household formation and other demographic factors that have historically driven sales. This will lead to a much more robust activity in single family home starts in 2011 and beyond. 
For the most recent PCA Economic Analysis, click here.

About Edward Sullivan
Edward Sullivan is Chief Economist for PCA. As Chief Economist he directs all PCA’s forward assessments of the economy, cement consumption and the construction industry – for the U.S., Canada, and international. He has more than 20 years of industrial economic analysis in support of seniorexecutives and has played an important role in several U.S. Government trade policy decisions. In the past, Ed has held Vice President positions at Chase Manhattan Bank Economics, Standard & Poor’s, and Wharton Economics where he worked with Nobel Lauriat, Lawrence Klein. His background also includes positions as a senior intelligence officer at the Central Intelligence Agency, and as an economist within the Office of Senator Edward M. Kennedy.
About the Portland Cement Association
Since its founding in 1916, the Portland Cement Association has had the same mission: "Improve and expand the uses of portland cement and concrete." Where cement and concrete are concerned, so is the Portland Cement Association: in manufacturing, in raising the quality of construction, in improving our product and its uses, in contributing to a better environment. In practice, this mandate means well-rounded programs of market development, education, research, technical services, and government affairs on behalf of PCA members-cement companies in the United States and Canada.