While each of the three presenters at the NAHB’s spring 2011 Construction Forecast agreed that things will be better by the end of next year, there was some dissention on the extent to which improvement can be expected, underscoring how elusive an accurate projection of the recovery continues to be.
David Crowe, chief economist at the NAHB, defined a normal housing market as one in which 1.5 million new homes are being produced each year. He calculates that we are currently at less than a third of such a rate, but is expecting modest increases to show up in this year’s second-quarter reports. From there, Crowe anticipates that the recovery will stay on a steady upward track until reaching the 1.5 million mark by the end of 2012.
Mark Zandi, chief economist at Moody’s Analytics, defines a normal annual production rate as a slightly higher 1.6 million units, but doesn’t think the market will achieve that level until 2013. By the end of 2012, he predicts, the industry will be at an annual rate of 1.3 million units.
Robert Denk, assistant vice president for forecasting and analysis at the NAHB, had slightly lower expectations. Based on the average number of starts achieved between 2000 and 2003, he defines a normal production rate as 1.3 million starts. The industry currently stands at 31% of that rate, but he believes that number will rise to 41% by the end of this year. And while he predicts continued improvement into next year, he puts the industry at only 60% of that 1.3 million start rate by the end of 2012.
Prices will continue to decline for another 12 to 18 months, Zandi predicted. He anticipates a 5% drop from current levels, which will bring prices down to 35% below where they stood at the peak in 2006.
While many factors are feeding into the pricing decline—Crowe pointed specifically to low consumer sentiment and employment rates that are barely off the bottom—the most pervasive is the swamp of distressed properties that builders are forced to compete with in virtually every area of the country.
Zandi pointed to Equifax numbers that show there are currently 3.7 million homes that are at least 90 days delinquent on their loans. Most of these will not get modifications, Zandi says, and those homes will pile onto the 2.25 million homes currently in foreclosure.
The continuing plague of distressed properties is feeding a cycle wherein distressed sales push prices downward, which creates more negative equity among homeowners. This in turn fuels more defaults and distressed sales. “As long as house prices are falling,” Zandi said, “we have reason to be nervous.”
However, there is some hope on the horizon. While foreclosures are a problem in markets across the nation, Denk emphasized that crisis levels of foreclosures are largely contained to states with “extreme housing distress or extreme economic distress,” referring to the bubble states (Nevada, Arizona, Florida, California) and the industrial Midwest, where many manufacturing jobs have been cut.
And according to Zandi, improved lending standards in recent years have made for fewer recent mortgage problems. “After this last bulge in delinquency, things look really good,” he said.
Zandi also has reason to believe that home price declines will not exceed 5%. Based on ratios comparing home prices to rental rates, as well as home prices between 1990 and 2003, Zandi feels that home prices have fallen to a point where they are now fairly valued.
He also pointed to investor demand, which he says is in the market. “These folks aren’t flippers,” he said. “I would view these more as investors” who plan to rent properties out, knowing they won’t get a quick return if they put them back onto the market in current conditions.
And while Crowe emphasized that the country is still suffering from a very high unemployment rate, Zandi was more hopeful, pointing to the good financial shape most businesses are in. With very healthy balance sheets, he said, these companies are poised to ramp up production, which will mean more jobs and more people in a financial position to buy a home.
And once those jobs pick up, Zandi is very optimistic about pent-up household formations coming onto the market. The current annual household formation rate is at 750,000, he said. In a healthy economy, that number would stand at 1.2 million, meaning that there is a large shadow market of households waiting in the wings.
Once things pick up, Zandi told Builder in an interview, he expects the household formation rate to be even higher than the normal 1.2 million, as pent-up demand emerges. “We’re going to work off the excess inventory pretty quickly,” Zandi said during the forecast. “In the next three or four years, we’re going to see things pick up very quickly.”
Crowe agrees that there is plenty of pent up demand in households that have yet to form. “The 30-year-old living in mom’s basement is not a sustainable lifestyle.”
Claire Easley is senior editor, online, at Builder.