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Homebuilders Send Mixed Signals About Pandemic-Stricken Construction Segment

May 18, 2020 by Marc Rapport
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New construction is being closely watched for signs of rebound in the housing market, and the signals seem mixed.

For instance, the National Association of Home Builders (NAHB) reported in the past week that while credit has tightened for builders and developers for the first time in nearly a decade, they're seeing some of the renewed interest in mortgage applications that's being reported industrywide.

And when builders decide to commit, they'll be paying less for materials, which posted a record monthly drop in prices for goods used in residential construction in April. In fact, the 4.1% drop in one month is four times larger than the previous record of 1.3% one month during the Great Recession. That occurred at the same time that hundreds of thousands of construction jobs vanished.

Remodeling the market

NAHB chief economist Robert Dietz noted in a blog last week that mortgage applications have been rising for the past few weeks and that while they're 10% lower than a year ago, "these data match anecdotal evidence indicating that buyer traffic improved in housing markets in recent weeks."

That would be a sharp turnaround from such reports as the U.S. Census Bureau's findings that new home sales plunged in March and the NAHB's own Housing Market Index, which fell off a cliff in April.

Now, however, the trade group is forecasting housing's 14.9% share of national gross domestic product to rise in the next year, and not just because of more sales. "Due to the lockdowns and changing homeowner preferences, we expect demand for remodeling projects that enable existing homes to incorporate more space for home offices and exercise equipment," Dietz wrote.

Belts tighten all around

Meanwhile, in a separate report, the NAHB said builders and developers reported in the first quarter that they were seeing tighter credit conditions for borrowing for land acquisition, development, and single-family homebuilding.

The trade group said the last time that kind of credit constriction happened was in 2012, and that it reflects similar findings from a recent Federal Reserve survey of senior loan officers.

The end buyers, consumers making their way through a pandemic-stricken economy, also may be seeing their access to new credit tighten, both for first mortgages and home equity lines.

Gimme shelter, now or then

Lenders, of course, are reacting to the embedded risk posed by an economy beset by Depression-era joblessness and a housing market where millions of homes are now in forbearance. Forbearance delays payments, it doesn't cancel them, and those obligations are just building.

But also building up is pent-up demand, which is being touted in many quarters as tinder waiting to be sparked into a market resurgence after a lost spring selling season. As the U.S. economy recovers from the plague of COVID-19, housing, including new construction, can perhaps help set the pace.

"Unlike other kinds of economic transactions, a home purchase delayed is often not a home sale lost," writes Dietz, the NAHB economist. "People move for a variety of reasons, including changes in household size and structure. This is important because it implies that housing is a sector that can lead an eventual recovery."

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