With new and existing home sales likely to fall to new lows in 2011, it’s hard to muster enthusiasm about the housing market’s future. But that’s exactly what two economists and a market analyst attempted to do at the NAHB’s Fall Construction Forecast webinar on Wednesday afternoon.
David Crowe, the association’s chief economist, didn’t try to sugarcoat current market conditions: builders and consumers remain gloomy, and why shouldn’t they be with the gross domestic product inching ahead at only 1.5%, job growth stalling and not expected to improve markedly next year, and 5.5 million homes in some state of financial distress. Only 422,000 single-family homes are expected to start this year, which would be 10% fewer than during a weak 2010.
But there’s reason for hope, says Crowe. For one thing, home prices around the country are normalizing: The ratio of house prices to household income, which skyrocketed to 4.7 in 2006, is now a more manageable 3, and approximately 70% of the homes sold this year were affordable to median-income households. For another, interest rates for mortgages should remain low for at least the next two years. And multifamily starts, while still considerably below historical levels, are projected to be up 48% in 2011 to 169,000 units, with half of those starts four stories or more.
A growing number of multifamily starts are rental apartments. But Crowe remains convinced that demographic trends will ultimately favor homeownership. Despite a huge jump in renters between 2006 and 2010, Crowe notes that renters still account for only about one-third of all households. His presentation included a chart showing a gap of more than 1 million between the number of households and the number of people who want to form households. And NAHB’s polling has consistently found respondents wanting to own a home, althought a sizable number of younger Americans “aren’t going to do that right away.”
Crowe says that while the unemployment rate is likely to remain in the 8.5% range in 2013, GDP is already improving and should continue to do so through the next two years. Consequently, NAHB projects that single-family housing starts will increase by 17% and a whopping 46%, respectively, in 2012 and 2013, to 723,000 units; and that multifamily starts will grow by 19% and 14% in those two years, to 212,000 units in 2013.
NAHB’s forecast acknowledges that there will be wide variations in the pace at which different areas around the country recover. Robert Denk, the association’s assistant vice president of forecasting and analysis, noted that during the housing trough of 2009, the industry was producing only 28% of its normal production of single-family homes. However, Denk points out, some states actually bottomed out at between 50% and 60% of normal production. “And the number of states that are returning to normal is getting larger. That’s very important for its implications for foreclosures.”
Denk expects housing starts to be within 42% of normal production levels nationally by the fourth quarter of 2012, and at 61% by fourth quarter 2013. “And more than half of the states will do better than the national average.” By the end of 2013, the states that rank in the top 20% in housing production will be back to 76% of normal ranges; conversely, the bottom 20% will only be at 51% of normal production.
The conundrum, Denk notes, is that several of the states that are progressing more slowly, such as California and Florida, are among the largest in terms of housing starts.
Also participating in the webinar was Joel Prakken, co-founder of Macroeconomic Advisors, who believes that the economy's vital signs will keep improving over the next two years and that total housing starts should hit 1.2 million in 2013.
Prakken’s presentation was subtitled “No Recession, Just Muddling Through,” and his predictions were peppered with caveats. Even though he foresees GDP growth rising to between 3% and 4% in 2013, he cautions “recession risks have become quite elevated.” What concerns him most is the possibility that the so-called Super Committee of lawmakers in Congress won’t be able to find $1.5 trillion in budgetary savings, thereby triggering what Prakken calls ”draconian” automatic budget cuts that, in his calculation, would alone reduce GDP growth by 8/10th of a percentage point annually.
Even if that committee does its job, Prakken fears that “the favored status of housing,” in terms of tax breaks related to borrowing and buying houses, “could be compromised.”
That’s why he’s being a bit more circumspect about where he sees the economy and its housing sector heading, predicting “only gradual improvement in financial conditions and the slow release of pent-up demand” for goods and services, including housing.
Other risks to growth, he enumerated, include Europe’s inability to fix its financial system, house prices and housing construction relapsing, soaring oil prices, onerous domestic fiscal restraint, and global turmoil that “unnerves” financial markets.
On the other hand, he observes that American households “have made significant progress” in reducing their debt, which in the long run should be good news for home sales, if only banks would loosen their lending. “Will the financial system be able to finance the expansion of the housing market?” he asks. “It’s a long way from being normal.”
John Caulfield is senior editor for Builder magazine
