Economists may have pared their housing growth expectations for 2010 in the face of weak production following the expiration of housing tax credits at the end of April. But they are still calling for, on average, a 15% increase in housing starts this year based on the belief that employment prospects will brighten later in the year.
The 15% consensus increase, gleaned from the forecasts of six leading housing economists, is a far cry from the 20% to 50% surge in housing production that economists were calling for as the year began. Those predictions were based, among other factors, on the 20% acceleration of housing starts from January through October 2009.
The speed-up continued on pace through the first four months of 2010. But after the expiration of home buyer tax credits, which apparently pulled forward demand, housing starts slowed dramatically to a meager 549,000 seasonally adjusted rate in June. That's below the 554,000 homes started last year.
Slow job growth, weakness in the overall economy, and continued deflation in home prices have forced adjustments in forecasts. But housing economists remain very bullish about the industry's prospects later this year and into 2011.
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The NAHB, for instance, expects a 14% increase in housing starts this year. Chief Economist David Crowe believes that housing construction "will slowly improve throughout the second half of this year and into next year, bolstered by continued low mortgage rates, affordable housing prices, and an improving jobs market."
In his latest economic note, Crowe put a positive spin on the June figures for total housing starts. First, he noted that single-family starts barely moved, "suggesting that they are at or near bottom." Second, he said the monthly numbers for multifamily activity, which are typically very volatile, don’t look so bad when adjusted for quarterly activity.
IHS Global Insight was one of the most optimistic forecasters at the beginning of the year, calling for a 49% increase in housing starts. Chief Economist Patrick Newport now expects only a 14% increase in 2010 to 638,000 starts, followed by big increases in 2011 (962,000, or 51%) and 2012 (1,347,000, or 40%).
"The key for housing going forward is job growth," says Newport, who expects the economy to add about 800,000 jobs in 2010, followed by 2.7 million, and 3.5 million increases in 2011 and 2012. Through June, the private sector had added 593,000 jobs, though employment remains 7.9 million below December 2007 levels, according to the U.S. Bureau of Labor Statistics.
"The household formation rate will pick up once job growth takes off," Newport says. "Increases in the household formation rate, in turn, will reduce the housing glut, and this will stimulate new construction."
Freddie Mac Chief Economist Frank Nothaft remains among the most optimistic of housing forecasters. He's still calling for a 19% increase in new home starts this year to 660,000. He believes that low mortgage rates, more affordable home prices, and an improving jobs outlook "should keep the trend in sales generally headed upwards toward year end and into 2011."
Nothaft also has one of the most bullish forecasts going forward. He projects that housing starts will rise to 1 million next year, 1.5 million in 2012, and 1.8 million in 2013.
By contrast, Wachovia’s Mark Vitner has emerged as one of the most bearish housing forecasters. He expects housing starts to eke out only a 5% gain this year, due to summer weakness, though he’s calling for a big increase to 850,000 units next year. His forecast is contained in Wachovia's Monthly Outlook.
"We now expect residential construction outlays to fall 7.5% during the third quarter but then look for a legitimate recovery in home sales and new home construction to finally take hold later this year," says Wachovia's July edition.
The economists at Fannie Mae believe that job security will be the key to housing’s turnaround, even though housing is affordable now due to low mortgage rates and nominal housing prices. "As long as households are concerned about job security, affordability will not be the biggest driver of housing demand," write Chief Economist Doug Duncan and Orawin T. Velz in their July forecast.
Another drag, the Fannie Mae economists say, will come from homeowners who owe more on their mortgage than their house is worth. Five million homeowners had a mortgage with a loan-to-value of 125% or more in the first quarter of the year, according to First American CoreLogic.
Nevertheless, Fannie Mae still forecasts a 17% increase in housing starts this year to a 648,000 level, and a 44% increase to 932,000 starts next year.
PMI, the mortgage insurer, recently cut its 2010 new home sales forecast in half. Going into the year, the group was calling for a 19.9% increase in new home sales. Now, it only forecasts 9.4% growth. David Berson, the former chief economist at Fannie Mae, leads the forecast team at PMI.
"The expiration of the second tax credit has hit housing activity hard," PMI wrote in its latest newsletter, "after having drawn sales forward into March and April. Moreover, all of the near-term leading indicators of housing activity suggest no pickup in coming months (and perhaps even additional declines.)"
PMI is predicting a 48.7% increase in new-home sales next year, though.
Mark Zandi, chief economist at Moody’s.com, said at our Housing Leadership Summit in May that housing starts should reach about 700,000 this year, then rise to 1 million in 2011, and about 1.7 million in 2012. He described 1.7 million housing starts as consistent with demographics in a normally functioning economy.
Zandi recently said on PBS that the housing market appears to be "double-dipping." He told PBS audiences that house prices will continue to decline this year as foreclosure sales and short sales pick up later in the year.
Nevertheless, Zandi has one of the more optimistic forecasts for growth this year. Moody's expects starts to finish 2010 21% higher than the year before.