As analysts and other home building economic prognosticators work to foretell what 2011 will bring for the industry, their crystal balls are foggy at best. There are just too many moving parts impacting the industry to predict the future with any great degree of accuracy.
Certain economic elements we know will affect the economy this year. But if the last four years of the housing bust have taught us anything, it’s that industry-ravaging events--such as the foreclosure fest--also have a way of popping up unexpectedly.
That said, here are at least 10 business and economic issues to watch that have the potential to shape the home selling market of 2011.
1 and 2) Interest Rates and Unemployment
These two seemed to be tied for the top spot in importance with analysts and economists.
“Job growth and hiring, that’s the No. 1 issue,” said Mark Vitner, senior economist for Wells Fargo Securities.
People who are fearful for their jobs aren’t likely to be in the home buying market. And Vitner sees no signs that the employment market is getting any better.
Hiring “data lags a little bit, but there’s nothing [indicating] that there has been a significant pick up in hiring,” Vitner said.
Yet analyst Stephen East of Ticonderoga Securities says he sees some small but hopeful signs that the jobs situation is easing some. “A lot of data points...are weak, but headed in the right direction,” he said. “Employment is a lagging factor.”
Mortgage interest rates are an equally important economic indicator for home builders to watch, said East. “I think if we get to the 5-!/2 percent level in the next month or two, I think that could cause some problems.”
Buyers have gotten used to interest rates in that range and are unlikely to make a decision to buy a new home just because the interest rate is at that point, he said.
And a higher rate would be even more discouraging.
The foreclosure catastrophe is likely to get worse before it gets better, said Vitner. “We look for an onslaught of foreclosures right at the start of the year,” he said.
That doesn’t bode well for the Spring selling season unless builders find ways to make their products look much better than what’s available as a foreclosure.
4) Depreciating Credit Scores
Increased foreclosures means that more potential home buyers have poor credit and are unlikely to qualify for a new home loan.
5) Lending Standards
Given the foreclosure debacle following the years of easy mortgage credit, nobody expects lending standards to ease.
“Mortgage lending underwriting is likely to remain fairly conservative,” Vitner said. “I don’t think you are going to see much risk taking on the part of lenders. Appraisals are very conservative, underwriting is fairly conservative.”
6) Credit Availability for Builders
Finding a bank that will back a builder remains a challenge. There are some builders, though, who manage to overcome that through personal relationships with bankers and good records of pay-back.
7) Home Prices
Some economists, including Vitner, are predicting more erosion in home prices in the first half of the year, mostly because of the impact of foreclosures.
“We look for them to fall probably six to eight percent by the end of the year,” said Vitner.
8) Mortgage Buy Backs
Most publicly reporting builders with mortgage arms have said they continue to have minimal problems with lenders demanding that they be reimbursed for bad loans. Regardless, it’s something analyst East thinks could change and is therefore keeping an eye on it.
9) Materials Costs
Price increases are expected in some building materials, especially commodities such as copper.
“That is going to make it very tough for builders to offer a product that is affordable,” said Vitner.
And, should the pace of construction increase, those price jumps are likely to be more prominent. Lumber prices are likely to go higher with any sized increase in demand because so many sawmills have been shut down or closed during the economic recession.
This fits under the title of good problems to have. If the market picks up, builders who have shed 70% of their workers may have a tough time finding knowledgeable, experienced workers to meet the new demand quickly.
East said builders saw a little bit of that problem when they were building extra homes to take advantage of the tax credit last year. “I think as all these guys re-staff, it’s going to be fairly inefficient.”
East thinks builders next year will divide into two camps: those who keep their teams in place--despite economic difficulties--and be ready for a turn around, and those who keep laying off workers to meet the new economic challenges and become profitable again.
“We are going to see even more separation among the builders who are really going after [profitability] and those who decide that their cost structure has to be the reality for the next couple of years,” said East.