Housing starts for June SURPRISED on the downside!  Jobs are better, and builders seem more confident, yet the June number was down 9.3% month-over-month (9.0% for single-family detached).

My forecast for 2014, just revised to account for the latest data, is for a 9% increase in total home starts (annual total for 2014 versus annual total for 2013), and for a 6% increase in single-family construction.

Despite today’s soft number, my forecast for the next few years is still calling for significant increases in building activity.  By 2016-2017, we will be back above 1.5 million housing starts (including single-family and multifamily) annually.  Thirty-year fixed mortgage rates by then will be in the 6.0% range, but job growth will be booming, so demand will still be on an upswing.

The move-up buyers still dominate sales in the builders’ sales centers. I call them “the Haves.”  They have steady jobs, rising income, and good credit; they are buying larger and nicer homes than they had before, driving up the average size and price of homes.

Retirees are another strong segment.  Why?  They have equity, and they have cash.

The "sticker shock effect" that caused a pause in home sales last fall still persists today.  Builders are still facing record lot prices in many areas, which forces them to keep on prices moving upward. Affordability is still good, but not as good as it was.

The Metrostudy forecast is essentially driven by a return to “normal” patterns of consumer behavior.

One of these relates to the "doubling-up" of households during and after the recession.  We are seeing some evidence that young people who had moved in with their parents or relatives are now finding the means and the motivation to move out and get their own place. The Current Population Survey for 2013 showed evidence that 20-somethings are (again) leaving the nest.  More improvement can be expected.  Last year 2.1 million more people between in their 20s lived with their parents than would have typically been the case (based on normal headship rates, according to a Harvard study).  As these people (not to mention the 300,000 people in their 30s living at 'home') leave the nest, often for the second time, there will be more demand for housing.  The Harvard study concludes that 2.7 million more households will form among people in their 30s over the next decade.

The return to normal percentages as described above will help drive household formation rates back to normal levels.  Household formation rates typically average 1.4 million per year, but lately they have been running half this rate, or less (500,000-700,000).  During economic recoveries like this one, a rate closer to 1.7 million would be expected.  Even with mortgage-qualification issues and student loan debt, a very significant increase in new households in the years ahead is a sure thing.

The troubling question remains:  how many of these will be new-home buyers?  High student loan balances will continue to make mortgage qualification difficult for many, and high land prices keep many builders from catering to this group's needs. These will continue to be impediments, despite some recent legislative help with student loans.

In the meantime, watch for more demand from retirees in the next several years.