Economists are projecting that housing starts will increase from a record low of 550,000 in 2009 to between 675,000 and 700,000 in 2010. But the economy remains in the doldrums, unemployment continues to rise and foreclosures are still on the upswing, making the outlook uncertain for companies supplying the building, construction and housing markets.
“Single-family housing sales have begun to pick up and I see a positive road map ahead,” said Dave Crowe, chief economist with the National Association of Home Builders, at the NAHB-sponsored International Builders' Show, held Jan. 19-22 in Las Vegas.
“But the recovery will be much weaker than we expected and there is a need to be cautious because of all the negatives that still remain,” he said. “The economy and the housing market remain fragile.”
Indeed, even if housing starts reach projected levels for 2010, that number still will be the second-lowest level of U.S. home production since the mid-1950s and barely one-third of the record 2 million starts in 2005. Also, new-home sales of 374,000 in 2009 were the lowest since 1963 and two-thirds lower than 2005, when they peaked at 1.3 million.
“We won't add net jobs for several months, foreclosures will continue to rise, there is still some negative growth and unemployment will continue to rise until it peaks at 10.2 percent and it will still be at 8 percent at the end of 2011,” said Crowe.
David Berson, chief economist and strategist for PMI Group in Walnut Creek, Calif., agreed.
“Usually the steeper the decline, the steeper the recovery — but not this time,” Berson said. “This will be a jobless recovery like in 2001 and we will see more delinquencies, more foreclosures. The inventory of homes for sale is so large, prices could still be going down in 2010 and it could be three years before we get back to the long-term trend of home-price appreciation.”
Frank Nothaft, chief economist for Freddie Mac, concurred with that assessment. “Serious delinquency rates are likely to rise further in 2010, triggered by rising unemployment and house price declines. The high vacancy rate for homes with a defaulted loan remains a challenge,” he said.
Compounding the problem is that builders are having difficulty getting the loans they need to expand or to conduct business. “Banks are still tightening lending standards for businesses and consumers,” Nothaft said.
That may explain why builder confidence, according to an NAHB/Wells Fargo survey released Jan. 20, dropped a percentage point in January to 15, its lowest level in six months. A number over 50 indicates that builders view the sales situation as good.
Builders said they are concerned about unemployment and the continuing increase in foreclosures, which have inflated the housing supply and lowered house prices. As well, 75-80 percent of builders reported that their ability to obtain credit has worsened, according to the survey.
“That has significantly retarded the recovery,” Crowe said.
The net result: All plastic industry sectors that supply the building and construction market — vinyl window and door manufacturers, vinyl and wood-plastic decking and siding makers — face a challenging 2010, even though sales will certainly be up from the rock-bottom levels of 2009.
The only bright spot: increased window sales in the replacement market, thanks to the $1,500 tax credit that went into place a year ago. Window profiles and tubing account for 17 percent and pipes for 40 percent of PVC consumption in the U.S. Construction as a whole accounts for 75 percent of PVC demand.
“Housing has bottomed out,” said Steve Brien, global business director for chlor-alkali and vinyls for Chemical Market Associates Inc. in Houston. “The only question is, how long does it bounce at the bottom before there is an upswing.
“Siding and windows are tied to housing, which has been down since 2004. Things will be better in 2010 than in 2009 and better in 2011 than in 2010, but it will be nothing to write home about,” Brien said in a phone interview after the builders show. “Housing starts will still not be near the 1 million needed for the industry to be healthy.”
There is more excess capacity among siding companies than window makers so there could be more consolidation or rationalization in that segment of the PVC fabricating industry, he said.
“The issue now is, what is the tolerance level of these companies, and how willing are they to keep fringe assets intact” until the market recovers, he said. “If they start to think that the recovery is going to stretch out another year or two, they might say, 'We can't stand the pain on our higher-cost plants and maybe it is time we consolidate or rationalize plants.' “
The other dilemma facing PVC manufacturers is related to pricing, he said.
“Most companies have become very price-competitive because they want to maintain market share,” said Brien.
“But they have lowered prices to rock-bottom, there are just not that many sales to be had and their electricity and raw material costs have all doubled in the last six months.”
As a result, pipe and siding and window companies are all trying to push through higher prices at a time when demand is weak — and not just to make more money. They are trying to cover costs, he said.
When there is an upturn in the PVC market, the economy will follow, Brien said, as “PVC and the PVC fabricated products industry are the leading indicators of a good, healthy economy.”
“One or two quarters after we see PVC numbers take a jump-step up, we will hear numbers indicating a good economic recovery is under way. PVC is a unique end product. It just needs a healthy economy and infrastructure spending for it to work.”
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