David Crowe

Chief Economist 


Washington, D.C.

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

The U.S. economy is showing signs of a slow but steady recovery. However, worries about housing remain, and some economists are calling for a housing double-dip. While nothing is very certain at this most precarious point in the recovery, the odds are against any significant reversal in housing. There are four solid reasons for optimism.

First, housing production remains near an all time low. The past year will come in barely over 2009, which makes 2010 second to 2009 as the worst year since the 1930s and both years were about half the previously recorded low. The expansive building of 2004 to 2005 has been more than compensated for, and 45 states are now below their long-term demographically driven production levels. The NAHB estimates that cumulative single-family production is now three million homes under the long-term need.

Second, demographics still matter. The population of the U.S. continues to grow, and as the front end of the Echo Boom reaches household formation ages, demand for housing will increase. The Echo Boom is larger than the Baby Boom and will drive housing demand for at least the next two decades. In addition, a substantial pent-up demand remains on the sidelines after several years of poor economic performance. The NAHB estimates that as many as two million households remain in roommate or parent situations waiting for more promising economic conditions to form their own households. Thirty-somethings cannot continue to live in mom’s basement.

Third, there are signs that jobs and economic growth will show more definitive positive moves in 2011. The stock market has made solid and somewhat steady gains over the last several months. Holiday sales were better than expected. Durables such as automobiles and furniture sales have been increasing steadily since mid-2009. Banks report less consumer credit tightening and greater demand. The NAHB’s forecast, in line with other major economic forecasting firms, expects above-trend GDP growth at 3.7 percent in 2011. These signs and expectations will bring jobs and job security back, which will remove some of the consumer hesitancy.

Fourth, conditions in the housing market are buyer friendly. House prices are back to 2003 levels. A family with a median income can afford over 70 percent of the homes recently sold. The multiple of income needed to buy a home is just over three times annual income and down from nearly five times income. Mortgage rates have risen from their historic lows but remain in bargain ranges. Selections are wide in the existing-home market although the new-home market inventory is slim and buyers may have to wait for their home to be constructed. The early birds will get that worm.

Housing double-dip advocates point to poor house price reports and continued foreclosures. Both are legitimate concerns but should be observed with the proper view. House price measures, even the sophisticated ones, compare prices of recently sold homes to the last transaction. Nearly half of recent home sales are distressed, suggesting the previous transaction used as a base was at a much higher price than the recent foreclosure or short sale. The resulting price index is overly influenced by some of the worst price changes.

Foreclosures will continue but the pipeline of distressed mortgages has been declining for several quarters. The mediocre job recovery in 2010 and the slow processing of foreclosures will push the foreclosure cycle into 2011 and 2012, but job creation and pent up demand will counteract the trend. Distressed mortgages and foreclosure sales are heavily concentrated in about a dozen states.

The budding housing recovery will not be a barn burner, and it is unlikely there will ever be a point significant enough to call it a turn, but the underlying five-year dearth of construction while the population grew and matured are compelling reasons to believe that it must arrive even if it feels more like a crawl than a march.