Home building and the continued occupancy and use of homes make up nearly one-fifth of U.S. economic output each year. In every economic recovery except the most recent one, housing has led the economy out of recession. The past cycle broke all those rules, and home construction is just beginning to imprint its normal influence on the rest of the economy.
In a normal year, home builders start construction on 1.7 million homes including single-family homes destined primarily for owners and apartment units built primarily for rental to newly formed young individual and family households. At the peak of the boom, the industry was building more than 2 million homes per year to try to satisfy the heated demand for home ownership. At the bottom, the industry built an average of less than 600,000 homes in 2009 to 2011. Activity was back to more than 900,000 in 2013, and is expected to top 1 million in 2014. Still, normal production levels that align with underlying demographics are several years away.
The resurgence is slow because the collapse was so severe both in housing and, as a result of housing’s powerful influence, on the economy. Due to much debated circumstances, events, oversights and decisions, home building was bursting at the seams in 2005, when it built 1.7 million single-family homes—the largest number ever—and virtually all were destined for homeownership. Demand abated slowly as interest rates rose and house price increases cooled. However, the relatively orderly deceleration collapsed when financial markets buckled and nearly brought the entire world economy down.
Recovering from such a devastating collapse has taken five years and will likely take several more. Housing construction grew at double digit rates in 2012 and 2013, but it was partly because of coming from very low levels at the trough. Uncertainty remains as a result of the slow, unsteady recovery thus far.
But, recovery is underway and the greatest probability is for accelerating growth over the next two years. At least four reasons substantiate that claim. First, a pent-up demand has backlogged millions of household formations and move-up purchases. The underlying population of young adults should support an additional 1.2 million household formations every year. More households mean more houses. Also, existing homeowners have been moving at about half their normal pace.
Second, a sub-normal progress in rehiring and job expansion has been the chief reason behind the slow return of household formations and normal life-cycle moves, but that is changing. Job growth was about 200,000 per month in the last quarter of 2013. NAHB, along with most economic forecasting firms, expect that rate to increase in 2014, providing confidence to those waiting for positive economic news.
Third, the massive financial disruption to households and businesses is behind us. Households have replenished their net worth with a revived stock market and home values. Savings rates have come down from their highs during the recession as households feel more comfortable about their financial position. Mortgage distress remains high, especially in some of the markets that attained the highest delinquencies, but they are significantly below their peaks in all cases.
And fourth, the worst of the fiscal drag caused by indecision in Washington, D.C., blunt force spending reductions, and weaning from stimulus efforts are behind us.
Headwinds remain as the industry tries to put interdependent supply systems back in place. New hires need to be made once future orders are clearly in view, prices need to increase to reflect the increased cost of materials, land, and labor, and capital needs to flow so builders can prepare for the oncoming demand. And nothing can guarantee against an international crisis or terrorist attack sidetracking the recovery. Most important, the job recovery must encompass all levels so that a fresh supply of first-time home buyers continues to feed the resale market and allows those homeowners to purchase a new home.
Learn more about markets featured in this article: Washington, DC.