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Purchase Originations Should Stay Strong Despite Homebuilding Materials Shortage

Economists mixed on impact

September 9, 2004


Economists are mixed on the impact a building materials shortage will have on the mortgage industry.

Some say that even as the price of materials -- and houses -- rise, mortgage originations should remain strong.

"The large annual increase in house prices in the second quarter ... was the result of record low interest rates in June of 2003 and near-record lows in mortgage rates," Amy Crews Cutts, Freddie Mac's chief economist, said in a statement.

"After three years of declining mortgage rates and big job gains earlier in the year, housing demand is as strong as we've ever seen it," she said. "The housing market should remain strong for the next several quarters, but may begin to slow from record levels as interest rates start to gradually rise."

For the week ending Sept. 3, mortgage applications were up 7.7% from the preceding week, according to a statement from the Mortgage Bankers Association (MBA). New purchase and refinance originations increased, the MBA said.

"Applications for loans to purchase homes have revived in response to lower long-term interest rates," the MBA said in a market commentary. "The economy could be emerging from the 'soft patch', although that certainly is not clear at the present time."

But there is also concern that a scarcity of building materials will cut down on new mortgage originations, said Professor Gary L. Shoesmith, director of the Center for Economic Studies at Wake Forest University.

"There is a concern, of course there is," Shoesmith said in an interview. "When a buyer considers a home it's the final bill they are looking at. And building materials will add costs to a house, that would have some effect on mortgages.

"We've this before," Shoesmith said of the materials shortages. "They come and go ... but there is not reason to think they will last a long period of time."

International demand, rebuilding in the wake of two Florida hurricanes and a vibrant domestic home construction market is raising some concerns about a potential shortage in lumber.

"A steady supply of building materials available at reasonable prices is important to maintaining a vibrant housing market and to meeting the growing demand for affordable housing," Jerry Howard, executive vice president and CEO of the National Association of Home Builders (NAHB) in Washington, said in a recent statement.

The biggest concern among builders and Realtors is that a shortage of building materials, including lumber, will increase their costs. And that will make housing more expensive, Howard said.

"Rising wholesale prices of building materials have added $5,000 to $7,000 to the cost of building an average new home, and construction delays caused by supply shortages could translate into further cost increases," Howard said. "Left unchecked, these factors could result in serious disruptions to the housing market."

The National Association of Realtors (NAR) is monitoring the lumber situation but is not overly concerned right now.

"This comes up every so often," the NAR said in a statement issued to MortgageDaily.com. "The international demand is impacting prices. It might have some impact on prices, but we haven't seen much on it. We are watching the situation."

China's booming economy is gobbling up building materials at a brisk pace.

A national survey the NAHB conducted in July indicated that one-third of builders are experiencing shortages of oriented strand board and plywood, wood panel products used for wall sheathing, floors and roofs.

But the NAHB was encouraged that the number of builders experiencing shortages dropped from more than half in October of 2003.

"However," the association noted in the statement, "prices of those products remain high."

Builders are also short on cement, the NAHB found. Forty-one percent of builders surveyed can't get enough of the material used mainly in housing foundations. That's up from May, when just 11 percent were experiencing shortages.

The lumber shortages are not widespread across the country but instead appear to be more likely in certain patches of the nation, according to a new survey on domestic economic activity by the 12 Federal Reserve Banks.

The report, called The Beige Book, has been reviewed by the Associated General Contractors of America.

In Philadelphia, for instance, the bank reports that while material costs have increased there has been little negative effect on sales.

"Both builders and real estate agents expect the pace of sales to remain strong unless mortgage interest rates move up significantly," the fed said in the report.

In Cleveland, the cost of materials in recent months "was mostly flat, though they remain significantly higher than they were last year," according to the report.

"Overall, builders now expect that total sales in 2004 will be below or equal to those in 2003," the fed said. "However, most builders have not changed their expansion or land-purchase plans."

Material costs are going up in the Cleveland region "though less rapidly than earlier this year," the report said.

As expected, hurricane season in Florida is impacting the availability of building materials, according to the Atlanta Federal Reserve Bank.

"Increased building activity associated with the hurricane(s) will likely put additional strain of construction material and labor resources in Florida," the bank said in the report.

And in Kansas City, the report found, "nearly all builders still characterized new home construction as strong (and) building materials were generally available, but several builders said they were concerned about future shortages due to the rebuilding after" the hurricanes.

The NAHB applauded a recent move by the Bush administration to remove duties on Canadian timber of more than 27 percent. The duties had been in place since May. Removing them will increase supply and drive costs down, the association said.

The NAHB called the duties "the hidden tax imposed on American home buyers and renters."

"The duties have artificially boosted lumber prices and have helped line the pockets of domestic producers at the expense of U.S. consumers," NAHB President Bobby Rayburn said in a statement.

Patrick Crowley is a political reporter and columnist and former business writer for The Cincinnati Enquirer. Email Patrick at: [email protected]

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