The revival of the housing market, especially the single-family market, continues to grind forward at what seems like a snail’s pace. Progress has been slow and sometimes moves back one step for every two steps forward. The start-stop movement causes fear and uncertainty about future directions, and the supporting evidence around housing—economic growth, job growth, and headwinds—provides conflicting evidence of sure progress.
So what exactly gives forecasters like the NAHB and others room to suggest further growth? Let’s look at five pieces of evidence.
Pent-Up Demand The long, deep recession and the even longer slow recovery has left substantial pent-up demand. The median length of stay for homeowners has increased by two years, going from nine years in 2005 to 11 years in 2011. Despite the dire economic and housing circumstances, lives went on. Families grew or shrank in size, jobs changed, kids moved on (or returned), houses grew obsolete or needed substantial updating. The NAHB calculates that 4 million existing-home sales were deferred or eliminated during the downturn, compared with what would have occurred normally. Some of these sales still will happen as the economy improves and consumer confidence returns, and some of those sellers will become new-home purchasers.
Greater Household Formations Household formations are half what they should be given the underlying demographics of the country. NAHB estimates that an additional 2 million households would have formed during the past six years had formation rates followed historical patterns. Those that did form were more likely to be renters than homeowners. As jobs become more available, as incomes rise with experience, and as mortgage access improves, those ages 25 to 34 will favor homeownership. That demographic still responds affirmatively to the desire to be a homeowner; they just don’t have the financial wherewithal and stability to make the move yet.
Employment Job growth has become more consistent in 2014. Monthly increases have exceeded 200,000 for nearly all months. Unemployment rates are approaching what economists call natural long-term equilibrium levels. The gap between the general populations’ unemployment and younger age groups’ unemployment rates is narrowing; total employment is above the peak before the recession began. The Blue Chip Economic Indicators—consensus forecasts from private-sector economists—predict continued job growth to provide work for the new entrants as well.
Credit Cost Mortgage rates are off their record lows of 2012 and early 2013, but they’re still low by historic standards. U.S. long-term rates have benefited from Federal Reserve actions and international flight to safety during uncertain worldwide events. Neither will last and rates will rise as the Fed ceases purchases, uncertainties are resolved, and the economy expands. Options for future federal housing policy likely will increase rates as well. But even with these forces, mortgage rates are not expected to rise above 6 percent until 2016.
Mortgage Availability Access to credit remains a more immediate constraint than the cost of credit, especially for first-time home buyers. In addition to student debt, lower earnings, job mobility, and a preference for urban rental living, younger households suffer a greater impact from tight underwriting standards. But some relief is in sight. In 2013 and 2014, average credit scores for successful mortgage borrowers dropped slightly. While still restrictive, some of the uncertainties behind the impact of unwritten rules coming from legislation and more positive regulatory signals do indicate additional improvement.
Nothing is certain and many forces can deter our current path. But the primary drivers behind single-family housing demand are odds on favorites for a continuation of modest but forward movement.