The new year either will see the housing sector break out in a traditional, solid recovery or it will see another mundane nudge forward. It doesn’t take a Ph.D. in economics to know that. Unfortunately, any economist with two hands can list forces for both outcomes. But the scale is heavily tipped toward more growth in single-family construction in 2015 than any of the recovery years to date.
Economic forecasts come with the drivers most likely to dominate and the concerns that could cause a diversion. The primary driver behind a promising 2015 for single-family construction and sales is that we are due. New and existing home sales have advanced since their trough in 2011, but at a relatively slow rate given the depth of the collapse. When the final numbers are in, 2014 new-home sales will still be only half their normal level without accounting for all of the pent-up demand.
Healthy housing demand has been the primary missing link in this recovery, and the modest employment gains from 2010 to early 2014 were the leading cause behind the slow-to-return demand. The slow economic recovery diminished households’ comfort and ability to purchase a home. But as the economy finds its footing as monthly employment gains provide security that job losses and income stagnation have faded, and as home values continue to rise, those hesitant households will be back in the market.
Existing home sellers are the primary customers for new homes. Turnover in existing homes has begun to pick up and more of the sales are occupant to occupant rather than lien holder to investor. For 2015, new-home sales will depend upon those trade-up buyers for most of the market. The first-time home buyer will continue to suffer from poor access to credit, slow income gains, and difficulty accumulating a down payment. Their entry will drive an even stronger market in 2016.
But no good news arrives without caution. The headwinds that will continue to frustrate a full recovery remain credit, land, and labor. Building material price increases have frustrated builders over the past two years and some annoyances will linger but a slower international economy will relieve the worst of the price pressures suffered recently.
Credit remains the primary demand deflator. Mortgage underwriting standards have been unreasonably tight as the housing finance industry struggles to determine the boundaries that keep them out of jail and court. New laws and regulations and greater threats of court actions have made fines and reputational losses a greater concern than credit risks. Some recent federal pronouncements suggest modest relief is coming, but true clarity won’t arrive until Congress passes housing finance reform legislation.
That leaves some supply difficulties in amassing sufficient land and workers to build the homes demanded. Both conditions vary widely, but land and lot shortages may be the most dangerous. Builder and developer access to credit, particularly for land acquisition and development, has been the most difficult to resolve. Even if access improves, the time needed to bring raw land to finished lot takes years. A recent NAHB survey of developers found over 1 million lots in the pipeline, but that number must grow if the recovery is to track expected demand.
Beyond the most immediate forces that have kept the housing sector from moving at a faster pace, the risks to a housing recovery are the same as the risks to the rest of economy. The world economy weakened in 2014 and if the expected turnaround doesn’t occur in 2015, demand will weaken and housing will suffer along with other sectors.
One reason behind an optimistic economic forecast is that energy prices have fallen. But if oil prices rise, then consumer spending will shift back to energy expenditures. No economic model can envision the black swan that slips in without warning. Unpredictable events aside, all systems are aligned for the best improvement in year-to-year housing growth since the boom.