David Crowe

Chief Economist 


Washington, D.C.

Anje Jager/agencyrush.com David Crowe Chief Economist NAHB Washington, D.C. dcrowe@nahb.com

The year did not start well. The harsh winter, large snowfalls, and severe cold temperatures in most of the states east of the Rockies chilled housing and contributed to negative economic growth after 11 quarters of positive growth. The first quarter of 2014 recorded only the second negative growth time since mid-2009 when the economic recovery began. Given that start, the rest of the year was great by comparison. 

The steady but modest growth since then will barely make a positive advancement in housing production for 2014 compared with 2013. The weather-caused delay in housing construction had only a partial rebound in early spring. Even as mortgage rates dropped toward 4 percent, consumers remained careful with their purchases. Total housing starts likely will improve over 2013 by 7 percent—steady progress but the slowest growth of the recovery.

There are many causes for the slower progress. New-home sales are primarily move-up homes sold to those who owned a home, had good credit, and kept their jobs during the recession. As the recovery continues, the pool of buyers with these characteristics dwindles. The continued rise in existing home prices has improved equity position, but some homeowners with good credit refinanced into low-rate mortgages that they aren’t in a hurry to give up.

On the positive side, employment growth in 2014 helped increase potential buyers. The number of jobs grew by almost 2.5 million, the best since before the crash. The strong correlation between job growth and housing construction means the places with the strongest employment growth are the markets with the largest increase in housing construction. The job growth effect has been weaker than prior recoveries because job growth has been in lower paying service jobs instead of the traditional growth in goods producing industries. That trend is gradually waning as higher paid jobs are created.

Continued house price appreciation also has encouraged current homeowners to use their equity for a new home. Existing home prices as measured by the Case-Shiller index rose nearly 6 percent in 2014, which is more in line with historic trends before the boom and lower than in 2013, when investor demand and short supply drove up prices especially at the lower end of the price spectrum. 

The lack of participation by first-time home buyers also has slowed the expected recovery. Adults usually purchase their first home when they are 25 to 34 years old. But myriad factors have delayed that move including tight credit standards, fewer employment opportunities at pay similar to their predecessors, and delay of marriage and having children. 

The low first-time home buyer participation affects new-home purchases in two ways. First-timers have cut their share of new-home purchases almost in half. And they aren’t buying as many existing homes, either. In the past, nearly half of existing homeowners selling to first-time home buyers bought a new home. Not only are there fewer first-time purchases, but the domino effect also has been cut in half. First-timer participation must await better mortgage underwriting standards, job growth, and more mature behavior from millennials.

The flip side of the slow take up in first-time home buying has been the construction of apartments, which recovered from the 2011 trough and grew to new cycle heights around 350,000 units per year. The expansion hasn’t included added condo construction, which fell from half of the multifamily units to 1-in-10. The rise in additional households feeding the rental boom is still well below expected levels given the underlying population, and the share of adult children living with their parents continues to be higher than any recent period. 

The trend in move-up buyers dominating the new-home market and rental units for singles dominating the multifamily market has resulted in rising sizes of single-family homes and falling sizes of apartments. These trends will persist until younger cohorts get better jobs, mortgage underwriting restrictions become more reasonable, and consistent economic growth is established. Next year should begin that process.