In its latest construction forecast, the NAHB on Wednesday stuck to its guns that “underlying fundamentals” such as low mortgage rates, decent economic growth, and pent-up demand for housing will drive double-digit percentage increases in home starts this year and next, and reverse catastrophic declines in new and existing home sales.
However, the association’s analysts leavened its predictions with questions about how severely the future rate of foreclosures would likely impact sales and home prices.
NAHB delivered its forecast on the same day Federal Reserve chairman Ben Bernanke reiterated that a “depressed” housing market was thwarting stronger economic expansion, and nine days after the Census Bureau estimated that annualized housing starts in March had fallen to their lowest level in five months.
Nevertheless, David Crowe, NAHB’s chief economist, insisted several times during his presentation that builders and industry watchers should not overreact to soft numbers in March for permits and starts. He pointed instead to the 1 million- to 2 million-unit gap separating the number of current households (114 million) and what that number might be if household formations were occurring at normal levels. “You can’t live in your mom’s basement forever,” he quipped, referring to the rising number of young men and women who are living at home because they are having trouble finding work or are overwhelmed by college debt.
Crowe noted as well that market conditions continue to favor homeownership: for example, the ratio of average home price to household income—which skyrocketed to 4.7 in 2006—has come back down to earth and now rests at the historical average of 3.2. Crowe also expected mortgage interest rates to remain under 5% through the end of 2013.
He cautioned, though, that the housing recovery would vary by market, depending on such factors as foreclosure rates and unemployment. But the number of markets whose improvements in employment, building permits, and house prices exceed the national average increased to 101 in April of this year, from only 12 in September 2011. “And those markets are nicely spread out across the country,” he added.
Consequently, NAHB projects real GDP growth at 2.4% this year and between 2.5% and 3% in 2013. And it foresees single-family housing starts rising by 17% to 506,000 units this year, and 30% to 660,000 in 2013. Multifamily starts will be even more robust, NAHB predicts, increasing by 22% to 216,000 in 2012, and then easing a bit by growing 9% to 235,000 units in 2013. NAHB also expects remodeling to register a big jump—12%—in 2012, a projection that’s in line with recent estimates by Harvard University’s Joint Center for Housing Studies.
Also participating in the forecast webinar was Chris Varvares, senior managing director of Macroeconomic Advisers, whose projections about housing starts—which it expects to exceed 1 million units in 2013—are more aggressive than NAHB’s. “We’re looking for a return to a virtuous cycle, though we’re not quite there yet,” he said.
Varvares contended that the economy in general is moving toward “trend growth” and “better balanced risk.” He foresees the U.S. economy growing at a 2.6% rate this year and by 3.3% in 2013, less impeded by headwinds that are “dissipating” as financial conditions improve, uncertainty recedes, home prices stabilize, and global growth revives. He is encouraged by “deleveraging” of household debt, and by evidence that banks aren’t tightening credit any further.
He expects inflation to settle into the Federal Reserve’s target of around 2%, and doesn’t expect mortgage interest rates to rise to 6% until late 2014. Macroeconomic Advisers estimates that the country needs to build 1.6 million new homes per year between 2011 and 2020 just to keep up with demographic changes and demand. So he expects a “strong run” in construction after 2013.
As for future risks, Varvares conceded that the Eurozone’s financial “fix” could fail, and that failure could reverberate globally. He also acknowledged that the U.S. economy could slow if government spending is curtailed and tax policies change. However, he’s more inclined to anticipate positive outcomes in both of these scenarios, as well as in oil prices, U.S. home prices (which he expects to fall by only 0.4% this year, and then rise by 1.5% in 2013), and even the current political stalemate with Iran.
Closer to home, some housing markets in the U.S. “will get better faster than others,” predicted Robert Denk, NAHB’s assistant vice president of forecasting and analysis.
Building is slowly but surely getting back on track, he noted. In 2009, single-family home construction was only 29% of the 1.3-million-unit annual average between 2000 and 2003. As of the first quarter of 2012, construction was 36% of the average, and Denk expected it to rise to 40% by the end of this year and to 55% by the fourth quarter of 2013. But Denk showed how this recovery would literally be all over the map, simply because some markets are climbing out of deeper holes than others.
In his presentation, Crowe pointed out that while the national average for seriously delinquent mortgages is equivalent to an 8.4-month supply of homes, there are six states with a 1.5-year supply, but also 24 states with less than six months’ supply.
“Foreclosures are the 600-pound gorilla” that is determining how quickly markets recover, said Denk. He pointed specifically to Georgia, where the house-price bubble wasn’t severe but where foreclosures have accelerated, especially in Atlanta. He also noted that where Florida and Texas have about the same number of mortgages (between 3.1 million and 3.2 million), Florida’s foreclosure filings rate per quarter has been about 10 times that of Texas’, which explains why home sales in Texas have remained fairly strong during the recession while Florida’s plummeted.
In terms of home-building health, Texas is among the top 20% of states, a group whose new-home construction should exceed 70% of their historical averages by the end of 2013, said Denk. Florida and Georgia—along with much of the Midwest, California, Nevada, and Arizona—are in the bottom 20%, with construction rates anticipated to remain below 45% of normal through the end of next year.
John Caulfield is senior editor for Builder magazine.