“We are in a crisis of historic proportions.” That apocalyptic observation comes from Brendan Lowney, chief macroeconomist for Westford, Mass.-based Forest Economic Advisors, who last week added his voice to the growing chorus of builders and housing watchers who foresee a serious future shortage of new homes if construction doesn’t pick up appreciably and soon.
Annualized housing starts fell nearly 6% in August from a year ago to a seasonally adjusted 571,000 units. That is actually up from the average for the first six months of the year. But the number falls short of replenishment to match current sales levels, said Lowney.
In his August 15 presentation, Lowney checked off—and in some cases debunked—real and perceived threats to housing’s and the economy’s growth. The usual suspects, including the meltdown of the Euro and rising oil prices, made their inevitable cameo appearances. Despite a slowdown in its economy, China's consumption of refined oil grew by 4.4% in July, to 21.86 million metric tons, compared to the same month a year ago; the “upward pressure on demand” coupled with “very tight supply” could produce another oil shock” that would tip the U.S. into another recession,” Lowney said.
However, he didn’t think the American presidential election is going to make all that much difference. “Taxes will rise and government spending will decline no matter who wins,” he predicted. And Lowney thought there’s only a 20% likelihood that Congress won’t negotiate a budget deal before automatic draconic cuts kick in on January 1, 2013.
Lowney scoffed at the notion that student debt is dampening the home-buying urge among younger prospects. He pointed out that more than 70% of student loan balances are under $25,000. “The key is getting the millenials employed,” said Lowney, especially given his projection that the 25-34 year old cohort is expected to peak at 44 million people in 2014. (On the other hand, he also pointed out that the 70-to-74 cohort, a still-important home-buying group, won’t peak until the 2030s.)
A much bigger problem, in his estimation, is the growing tide of household debt, 75% of which is mortgage related and is likely to linger even as the overall economy improves.
Lowney sees home sales as a “key indicator” of whether the larger economy is getting healthier. He noted that throughout most of the post–World War II era, every new-home sale has equaled two home starts in the following six months. So if new home sales are at 350,000 (as they were in June), then single- and multifamily starts need to be around 700,000 just to keep inventories flat over the long term. Indeed, Lowney actually thinks 822,000 starts per year are going to be needed, at minimum, to keep up with demand through the next 15 years.
In his comments, Lowney dismissed the notion, floated by some analysts, that multifamily construction, especially for rental housing, would continue to accelerate at the expense of single-family building. He notes that even with the considerable dip in single-family homes—which as late as 2009 represented 85% of all construction—these starts still account for more than 70% of the total today. “The demise of the single-family home is greatly exaggerated,” said Lowney.
John Caulfield is senior editor for Builder magazine.