David Crowe Chief Economist NAHB Washington, D.C. dcrowe@nahb.com
Anje Jager/agencyrush.com David Crowe Chief Economist NAHB Washington, D.C. dcrowe@nahb.com

Is 2012 the year that housing will finally show its muscle or will we continue to idle along at a barely perceptible pace? From a national perspective, the most likely outcome is somewhere between the two extremes. From a market segment or geographical perspective, the outcome will have considerable variation. The recovery will be just as different from place to place and segment to segment as was the collapse.

The most significant predictor for this housing recovery is employment. Housing consumers need assurance that their jobs and incomes will remain steady. Underlying housing conditions are ripe for a recovery. Mortgage interest rates are at record lows, house prices have fallen back to 2003 levels and have stopped their dramatic declines. Mortgage rates will remain low because the economic recovery will not be strong enough to push them up. House prices have already recovered in some markets, and that trend will continue as more localities work off foreclosures. A pent-up demand of over 2 million households waits for stronger, consistent economic health signs. And the demographics of household formations are very positive as the large cohort of Echo Boomers reaches the time to move into their own homes.

Nationally, single-family production will edge forward to about one-half million starts, which is a 17 percent improvement over the expected 2011 level. But 2012 single-family production will still be only one-third of the way to a demographically driven 1.5 million homes per year. The modest, first-time buyer or first move-up home will be the most active as many longtime homeowners decide to remain in place. The best places will be the cities and states that had the least fall from normal production and have some underlying economic strength returning. The NAHB/First American Improving Markets Index has been steadily growing as one indication of where the recovery will show the most change.

States in the center of the country will improve first while the four poster children for excessive house price acceleration (California, Arizona, Florida, and Nevada) will lag behind. Except for Georgia, Southeastern states will move a little faster than the nation as a whole as will most of New England. States in the Rust Belt will be some of the last to recover.

Multifamily rental construction will continue on its much-improved path to recovery. Since 2005, all the 3.5 million household gain has been renters. But in that same period, the industry completed construction on 1.5 million multifamily units. So far, the additional two million rental homes came from the multifamily vacancies and single-family rentals. However, multifamily rental vacancy rates have fallen from over 12 percent in 2009 to just over 10 percent. As the economy improves and first-time job entrants find employment, the need for multifamily apartments in urban settings will continue to increase. The NAHB forecasts multifamily production nearing the 200,000 annual levels by the end of 2012, which is more than halfway to the stable production levels of 300,000 to 350,000 a year.

Remodeling spending has been a bright spot in the housing arena as more households modernize instead of move and from the tax incentives for energy conservation improvements. The tax incentives were reduced in 2011 and are uncertain for 2012 but the trend toward remodeling as a substitute for moving will continue. Another less welcome but nevertheless substantial force behind remodeling has been repairing and upgrading foreclosed homes in order to return them to the market. At least another two to three million homes will see foreclosure, and many have not seen maintenance for several years. The NAHB expects a healthy 12 percent increase in remodeling owner- and renter-occupied homes in 2012.

After four years of rapid housing production decline and two years of bouncing around historic lows, the industry is poised for improvement. Progress will be spotty in place and building type but barring unanticipated international shocks housing will see slow but positive advances in 2012.