In my view we will have reached a real milestone when starts exceed a million units. I think it likely we will reach that threshold in 2013.
Housing permits, which are a leading indicator of housing starts have been positive since the beginning of 2012 which leads me to believe housing starts will improve throughout 2013.
The rate of home foreclosures has declined for five months in a row. New family formations are also improving after a long dry spell.
Home affordability has risen dramatically. All we need now is for banks to step up and loan money for mortgages, which will be a key to the housing recovery. Hopefully, Obama will help that with new home-affordability legislation.
What does the Obama re-election mean for housing? I think we can assume the president wants the economy to recover so that he leaves a positive legacy for his second term. It’s likely that the policies started by Obama in his first term will continue including:
- The refinancing push
- New mortgage regulations to protect existing homeowners
- The mortgage interest deduction is probably secure, so there won’t be a disruption of the real estate market
- Reduction of mortgage principal as a means of adjusting mortgage payment is probably not a possibility
The Federal Reserve has added unemployment to its list of concerns. With unemployment among construction workers – 17.6 percent –more than twice the national total, the Fed is trying to stimulate housing to reduce unemployment. It will purchase mortgage-backed securities at a rate of $40 billion per month and put them on its balance sheet. Shifting assets to the Fed’s balance sheet is called “quantitative easing.” This is the third such effort and is referred to in the financial press as QE3.
Energy keeps powering growth
Energy-market strength made 2012 a particularly good year for many equipment manufacturers, especially those that build drill rigs, pumps, compressors, gensets and equipment that supports the shale-fracking process. Dealers in places that had been considered backwater markets such as Western New York, Western Pennsylvania and North and South Dakota had banner years. Development of natural gas in those regions will prove to be revolutionary for the U.S., putting us on track to become energy independent within 10 years.
The bad news is that coal and natural gas prices are locked in what appears to be a race-for-the-bottom death struggle, pulling each other down as electric power plants switch from coal to gas. Historically, utility managers always considered declining natural-gas prices to be temporary, due perhaps to mild temperatures or other factors. Power-generation companies were reluctant to switch energy sources because they feared that as soon as they shifted from coal to natural gas prices would rise, particularly with very cold winter weather. But now abundant cheap supplies and environmental regulations favor gas long term. Analysts at the Energy Information Agency (EIA) believe it is likely that coal production will be under pressure for four years after which it will begin growing again.
Uncertainty in the coal market and a dip in mineral commodity prices caused equipment manufacturers to scale back production. For example, both Caterpillar and Liebherr have laid off people at their mining-truck manufacturing plants. Until a few months ago everyone was sure that metal commodity markets would remain strong. Since then iron and copper prices have pulled back to the point where some metal producers have reduced the size of development projects or cancelled them altogether.
Emission regulations had an impact on new equipment purchases in 2012. The U.S. EPA dramatically lowered allowable levels of toxic emissions from diesel engines with Tier 4 Interim regulations applied to high-volume engine sizes on January 1, 2012. Equipment manufacturers have struggled to conform. Some manufacturers have been able to continue producing and selling machines powered by Tier 3 engines because of accumulated EPA credits.