This summer. Maybe.
That’s when some forecasters say the housing market will finally make a definitive turn toward a sustainable, nationwide recovery.
But don’t hold your breath. That noise in the background is the sound of feet of clay treading hesitantly on shaky ground. The confidence industry watchers have in their own convictions about where housing starts and sales will land in 2011 and beyond has been rattled. Most missed the mark over the past four years, calling for recovery as housing and the economy stubbornly played dead.
“You think we were too optimistic last year?” deadpans NAHB forecaster Bernie Markstein, referring to the trade group’s projection that housing starts would rise by 24 percent in 2010.
The NAHB retrenched last summer, when construction slumped after the stimulative effect of the home buyer tax credit wore off. But the trade group was hardly alone with its optimistic forecast—virtually every other expert’s estimate exaggerated what the market actually bore: a gain in starts somewhere between 6 percent and 9 percent. That’s why predictions these days seem more like multiple-choice quizzes, with different answers for different economic scenarios. Typical of this ambivalence, Freddie Mac titled its November 2010 Economic Forecast “Half Full AND Half Empty.”
IHS Global Insight, which had published one of the more bullish housing forecasts for 2010, doesn’t want to make that same mistake again. “Things are extremely weak right now, and we see conditions improving slowly,” says its U.S. economist Patrick Newport. IHS thinks builders will start anywhere from 555,000 to 783,000 units in 2011, depending on what happens in the economy.
Even the otherwise uniformly upbeat National Association of Realtors (NAR) has couched its home sales guidance for 2011 with caveats about whether (1) the new Congress extends the Bush tax credits and (2) inflation rises to 3 percent. NAR anticipates a flat first half of 2011, followed by a 26 percent jump in home sales in the third quarter.
The problem is that current events keep throwing off everyone’s compass, as when the Commerce Department late last year estimated that annualized new-home sales in October were off 8.1 percent to a measly annualized rate of 283,000 homes. Around the same time, the Federal Reserve watered down its Gross Domestic Product (GDP) projections for the next three years. Foreclosures are another corruptive force on sales and value. “A significant improvement in residential construction cannot begin until the foreclosure crisis is over,” asserts the Portland Cement Association, whose projections for single-family starts this year and next are below those of other forecasters.
What’s worse, potential home buyers seem as depressed as ever about their prospects and the economy. A poll of 2,034 homeowners and renters, which Trulia.com and RealtyTrac conducted in November, found that nearly three-fifths—58 percent—didn’t expect the housing market to improve until 2012. More than one-fifth of those surveyed thought the turnaround could be delayed until 2015.
DIFFERING CAMPS OF OPINION
In these uncharted waters, forecasters divide into three boats. First, there are the optimists. They include the website HousingPredictor.com that forecasts only 3.9 percent home-price deflation nationally in 2011. That would be the lowest on an annual basis in five years. Foreclosures and short sales might still drive price declines, but they are confined to 10 states that account for roughly 70 percent of the activity. “The rest of the country is in pretty good shape, and that’s where the employment and housing recoveries are likely to occur,” Markstein states.
New-home sales data from Hanley Wood Market Intelligence show that builders pushed prices in 18 of the top 100 housing markets last year. In each of those markets, builders outsold banks, which wasn’t the case in nearly all the other top 100 markets. On a national basis, REO sales not only beat out new-home sales, but sold, on average, for 35 percent less per square foot.
Freddie Mac is lodged squarely in the optimists’ group, too. Its forecast dismisses fears about a double-dip recession as “overblown,” and quotes William Dudley, president of the Federal Reserve Bank of New York, who noted that it’s “quite common” for early stages of economic expansion to hit a “soft patch.” Freddie Mac forecasts a 38 percent increase in housing starts for this year.
Gregg Logan, a managing director with the research firm Robert Charles Lesser & Co., asserted in a recent webinar that “most areas” of the country have been in recovery since last September. He predicted the residential for-sale sector would start bouncing back by the first quarter of 2011.
But he cautioned that the recovery’s arc would resemble “a gravy boat,” with “a slow climb out.” With that prediction, Logan may have slid back into a second group of forecasters whose views are best characterized by their realism informed by lowered expectations. The oarsmen on this team include Fannie Mae, which managed to find a silver lining in a still-high home vacancy rate that remained unchanged in the third quarter of 2011. Another realist, PulteGroup’s chairman Richard Dugas, could still see “year-over-year progress” in Pulte’s operations, even after that builder lost nearly $1 billion through the first nine months of 2010.
Other CEOs of public companies fall into the pessimists’ camp, the housing industry’s third forecasting cohort. They’ve adopted an underpromise/overdeliver mindset. Standard Pacific’s Ken Campbell told our sister publication, Big Builder, in October that the housing market probably wouldn’t get back to pre-recession normalcy until 2015. D.R. Horton’s chief Don Tomnitz told analysts in November that his company—which had just reported its first full-year profit since 2007—expected closings and revenue to retreat again this year.
Carl Reichardt, Wells Fargo’s housing analyst, attributes CEOs’ negativity to their frustration, after five years of declines, that they’re not seeing a V-shaped recovery. He also points out that while CEOs don’t want to admit they’re waiting for the economy to get better, “that’s the rock they’re standing on.”
HOME PRICES, JOBS PAINFULLY FRAGILE
Job growth, after a decade during which it basically flatlined, is a critical barometer for when and how strongly the economy and housing demand will revive. “The key is the labor market,” says Newport of IHS Global Insight. Most GDP projections, unfortunately, would seem to fall short of creating enough new jobs to jump-start the housing market. However, “a 3.8 percent real GDP increase in 2011 should show some improvement in employment,” predicts Freddie Mac’s chief economist Frank Nothaft.
Just don’t expect a plethora of good-paying jobs to suddenly materialize. Automated Data Processing may have reported that November had the biggest gain in U.S. private-sector employment in three years. But longer-term projections don’t hold out much hope that job growth will be anything but meager in 2011 or even 2012. Fannie Mae predicts that the unemployment rate “will get worse before it gets better,” and Ticonderoga Securities’ housing analyst Stephen East thinks the government might need to incentivize employers to hire workers.
Jeffrey Burnett, president and CEO of Labor Finders International, a Florida-based manpower staffing firm with 200-plus franchises in 31 states, can’t see unemployment falling back to pre-recession levels for another three to five years. Burnett, whose company gets about 45 percent of its business from the construction sector, also worries about those companies that have concluded they don’t need to take back full-time workers. “That’s a bit chilling.”
People who are jobless or underemployed aren’t thinking about buying a house. And if unemployment stays high for the next few years as predicted, builders can pretty much forget about price appreciation in their immediate futures. The prospect of another 2.5 million distressed home sales this year won’t help matters either, says housing consultant John Burns.
Fiserv Inc., the Brookfield, Wis.–based information provider that owns the Case-Shiller indices, estimates that home prices will fall another 7.1 percent in 2011. Even if prices were to stabilize more broadly, as they have in some coastal markets such as San Diego, “we’re projecting a long period when prices are just flat,” says Fiserv’s chief economist David Stiff.
His assessment seems positively sanguine compared to market watchers such as Zillow.com, which in November foresaw home values—which had declined for the 17th consecutive quarter in the third quarter of 2010—“approaching Great Depression–era declines, when home values fell 25.9 percent in five years.”
Builders’ pricing plight could become more uncomfortable if a new Congress decides to pull the plug on the income tax deduction for mortgage interest, an idea that budget hawks have been pushing for years, and which President Obama’s debt-reduction commission recommended in early December with a tax-credit chaser. As the housing sector’s lobbying influence and impact on the overall economy has diminished, warnings by the NAR and the NAHB—that the deduction’s demise would cause home prices to plummet—seem to be falling on deaf ears.