Much like the family car trip, the drawn-out housing recovery evokes the question, ‘When will we get there?’ Looking back on the worst housing collapse in our lifetime, we’ve nearly doubled production from its low near 500,000 starts. But sustainable annual levels should exceed 1.6 million for a few years of catch up. So, it is reasonable—even for the less anxious—to ask when things will return to normal.
Unlike past economic recoveries, housing has not been the leader in this most recent one. Total output of the U.S. as measured by real (inflation adjusted) gross domestic product is 6.8 percent higher than it was at its peak in late 2007, and more people are working now than ever before. But single-family home building is barely halfway back to its pre-boom, pre-recession levels of 1.3 million units a year.
There’s a long list of causes for the slower housing recovery, but it boils down to the fact that the wreckage in the housing sector was severe enough that potential home buyers are slow to return to the market. It took longer than any post-WWII recovery for total employment to come back to peak and household formations remain less than half their expected levels. As job growth continues its recent average of more than 200,000 added jobs per month, potential home buyers will become more confident in their own economic future. More people working means more households, and more households result in more houses.
The current year got off to a slow start averaging not much better than 2013 at an annual rate of about 950,000 starts. But the annual housing starts rate should exceed 1 million in the last half of 2014, which will be the first million-plus half year since 2008. Next year will see continued expansion as all of the underlying forces work in concert to improve the overall economy, boost hiring, and bring additional confidence to households. Total housing starts are expected to increase 20 percent in 2015, led by a 28 percent increase in single-family construction, which will be the fastest rate of annual single-family growth since 1983.
New single-family construction and sales are primed for a strong comeback for at least three reasons. First, new-home sales have more ground to make up than existing home sales. From 2005 to 2011, new-home sales fell 76 percent while existing single-family home sales fell roughly half that amount (39 percent). New homes’ share of all home sales fell from a consistent 16 percent to half that share. In the past two years, the trend has reversed and new-home sales have been increasing twice as fast as existing. As the inventory of existing homes remains relatively low by historic standards and existing homeowners remain reluctant to sell their current home, newly built homes will have to satisfy the demand and return to their normal share of the market.
Second, the seven-year period of recession and relatively weak recovery has left nearly 5 million existing homeowners in a home that they normally would have sold. Current homeowners changed jobs, experienced family size changes, earned more money, or simply wanted a different neighborhood and house but didn’t move because of the uncertainties in the market. As prices settle down to more reliable appreciation rates and consumers regain their confidence, many of these moves will occur. About half of the existing home sellers are new-home buyers and as these pent-up sales release, more new homes will be needed to meet the demand.
And third, the prime household formation age range—25 to 34—is filled with millennials, the largest birth cohort in our history. The rate of household formation has been about half of what it should be, and virtually all of the households that did form became renters. That trend will continue to help apartment building. Eventually, however, the rate of household formations will increase to a more historic level and more of those formations will be first-time home buyers.
Progress has been slower than a normal housing recovery, but many headwinds are dissipating and the tailwinds are building to produce faster growth in the next few years. B