Ed Sullivan, the Portland Cement Association's chief economist, turned from gloomy to negative about the outlook for housing and the economy as a whole, in his Spring Forecast. Just read a few of his bearish comments.
“The labor market has shed 240,000 jobs in three months, oil prices have climbed above $100 per barrel and gasoline prices will top $4 per gallon by summer. Retail sales have declined, credit card debt is near record levels, consumer confidence has tumbled and is already below 2001 recession levels, business confidence has crashed, credit conditions facing homebuyers, consumers and business have tightened dramatically, there is a strong likelihood that a large number of banks will fail, and the leading economic indicators has turned negative.”
Since then, oil touched $130 per barrel and gasoline prices hit $4 per gallon in many cities. The housing wreck has reached epic proportions, with an astonishing reduction from 1.72 million units in 2005 to 657,000 projected this year, and possibly less in 2009. And cement consumption, a key metric in the health of the construction materials industry, contracted 22.5%.
This is the second worst peak-to-trough downturn since the Great Depression, exceeded only by the 1980–81 recession. By Memorial Day, unsold housing inventory stood at 9.6 months. The other shoe to drop is the never-ending sub-prime crisis, which is expected to worsen in 2008 due to the increased number of sub-prime resets and weaker overall economic conditions. This will add the number of foreclosed properties to existing inventories.
Sullivan doesn't expect significant relief until late 2009. But by the end of 2010, he expects relatively strong residential growth across all regions. Still, while home prices are falling rapidly and making homes more affordable, a weaker labor market and rigid lending standards should offset this.
Help from Washington
There are encouraging signs. Unlike traditional fiscal policy wonks who were bureaucrats or economists by trade, U.S. Treasury Secretary Henry Paulson is a seasoned Wall Streeter who is trying to bring relief.
Late in spring, the Senate was debating its version of a bill that would allow the government to insure $300 billion in refinanced loans for struggling homeowners, mirroring a bill passed by the House. With an election looming, a compromise is sure to be struck.
While several hurdles remain, the bipartisan agreement, combined with positive signals from the White House, represents the clearest sign yet that Washington is ready for major housing legislation. But some fear that taxpayers could be on the hook for billions if homeowners who receive a guarantee on their loans later default. Congress is addressing this through a provision that calls for initial losses on defaulted loans to be covered by fees charged to Fannie Mae and Freddie Mac.
Another sensitive point is whether borrowers deserve any help; the program would cover borrowers who owe more than their homes are worth. Critics say borrowers who got in over their heads shouldn't get any government help. Supporters say government has an interest in keeping communities intact.
Regardless of the outcome, don't expect a turnaround until late 2009.