THIS HAS BEEN AN OUTSTANDING YEAR for the housing industry, and 2006 looks to be a lot of the same. Builders are optimistic about the coming year, and the high production guys in particular are well positioned for growth. And all this is happening despite the prognostications of “doomsay-ers” who have been predicting for several years now that the housing industry is on the cusp of a fall.
How can it be that the housing industry has remained strong when so many news items are focused on a supposed housing bubble? It's simple: steady immigration, consistent growth in household formations, a sound economy, continued low interest rates, solid job growth, and baby-boomer demand for second homes. All these factors are driving demand for new and existing homes.
Economists for the nation's leading housing and housing finance organizations agree that demographic factors are contributing to an average annual demand for new housing in the range of 2 million units for the next decade. To put it in perspective, that's roughly equal to the amount of housing currently being built.
Let me make it clear: There is no national housing bubble, according to a recent report on the state of the nation's housing by the Joint Center for Housing Studies at Harvard University. The report identifies 33 out of 110 of the nation's largest metro areas where median house prices exceed the traditional benchmark of four times the median household income. Those markets, which represent approximately one-quarter of the U.S. population, are experiencing significant housing affordability problems. But even in these areas—mostly in the Northeast, California, and some parts of Florida —there are no signs of an imminent collapse in housing prices. What we can expect is appreciation rates to settle at a more sustainable level.
On top of the strong demographic and economic factors is the development of sensible, business-friendly policies at the state and federal levels. On everything from environmental and land use policies to occupational safety and health, builders are working with regulators to establish laws that protect the environment and worker safety without creating unnecessary bureaucratic requirements that do nothing but push up the cost of housing.
And this year was a good one for construction liability reform. Three states this year enacted notice-and-opportunity-to-repair (NOR) laws that give good builders the opportunity to correct defects while preserving the homeowner's right to sue builders who don't address legitimate problems. These laws enable builders and consumers to resolve disputes without costly and contentious litigation. Now, there are NOR laws on the books in more than half the 50 states.
Continued strong demand and an evolving regulatory climate contribute to an excellent business environment for big builders. Even so, our industry must be prepared to face challenges that might arise.
Hurricanes Katrina and Rita reminded us just how powerful and destructive natural forces can be. In the wake of these storms, we are left with a significant rebuilding effort in the Gulf states from Alabama west to Texas. The big builders, in conjunction with the NAHB, have pledged significant resources in the effort to help families rebuild their homes.
Even as the Gulf states rebuild, the nation can be confident of the resilience of the housing market. With real growth moving forward at a sound and sustainable rate, and with inflation under control, the economy is more than strong enough to generate adequate new jobs and income gains to maintain solid housing demand, even as mortgage interest rates gradually increase.
Builders are better prepared than ever before to withstand future challenges, whether in 2006 or years beyond. Balance sheets are strong and profits are at record levels within our industry. Big builders in particular have taken advantage of technologies that help them produce high-quality homes in a more efficient manner. And if slowdowns do occur in specific markets, high production builders have the resources to ride them out from a position of strength.
