The nation’s growth “is finally being driven by housing again,” proclaimed David Crowe, NAHB’s chief economist, during the association’s Construction Forecast Webinar. Home prices have been rising, partly the result of tightening inventory of completed new homes, which in turn is stimulating demand. Employment—a major factor in home-buying decisions—continues to strengthen, albeit incrementally. And housing’s recovery is now national in scope.
However, that recovery has not taken full flight yet. Housing still only accounts for 3% of the total economy, or about half its historical level. Single-family home starts are at 47% of the 1.3-million-unit annual level that’s considered “normal” to meet anticipated demographic and population trends. And the bugaboos of unpredictable appraisals, labor shortages, rising materials prices, and the willingness of banks to lend for mortgages have the potential for hampering the industry’s rehab.
For example, he cited the Conference Board’s and the University of Michigan’s consumer confidence polling, which shows a growing number of people favoring homeownership and planning to buy. And over the last four quarters household formations—which averaged 1.4 million per year during the housing boom but plummeted to 500,000 during the bust—were percolating at an 860,000 average annual clip.
However, he also noted that this demand “has been all renters.” That dynamic has helped to “heal” the multifamily sector of the housing market, which NAHB estimates will increase by 35% to 334,000 starts in 2013, and by another 5% to 349,000 starts in 2014.
By comparison, NAHB projects single-family starts will increase this year by 26% to 672,000 units, and by 28% to 858,000 units in 2014. In other words, those starts would be 53% and 71%, respectively, of what “normal” production should be this year and next. However, there will be “huge variations” in the rate of recovery by state, predicted Robert Denk, NAHB’s assistant vice president of forecasting and analysis. A map he used during his part of the presentation projected that by the end of 2014, the top 20% of states will be at 87% of normal production, whereas the bottom 20% will still be below 60%.
Nevertheless, Denk saw housing trends moving in the right direction. All of the leading house-price indices, he said, “tell the same story: that prices are starting to rise again.” The ratio of house prices to annual household income—which during the last housing bubble went haywire—has leveled off to 3 to 2. And all measures of foreclosure activity—delinquent loans, foreclosures started, and inventory—are down, albeit with some nagging hangovers in a handful of states.
Builders can take comfort in the fact that pent-up demand for their products could be sizable in the coming years: there’s an estimated 2 million gap between potential household formations and actual household formations, said Maury Harris, managing director and chief economist-Americas for UBS, who during the webinar provided a macroeconomic perspective.
The Federal Reserve’s monetary policy of quantitative easing (QE), which is meant to keep interest rates low, has been pumping $85 billion per month into the banking system. “So banks are now flush with cash,” said Harris, and continue to ease their lending standards. And while he expected the Fed to cut back on QE eventually, Harris projects only a 1.3 to 1.4 percentage point increase in lending rates over the next 18 months.
Harris doesn’t fret too much about the so-called “shadow inventory” of bank-owned properties flooding back onto the market. “Much of what’s out there is probably in below-average condition,” said Harris, pointing to a poll of Realtors that found 31% of distressed sales in below-average condition.
Still, he thought it could take up to five years for household formations to catch up with demographic trends. And Harris believed the “wild card” in any growth patterns would depend on how the country deals with immigration.
Immigration is an immediate concern for builders that are struggling to find construction labor. Immigrant labor, according to Census Bureau estimates, represents 22% of the construction workforce. A few days ago, NAHB’s chairman Rick Judson testified before Congress urging lawmakers to implement a new market-based visa system that would allow more immigrants to legally enter the construction workforce each year.
As it is, more than half of the builders who responded to a recent NAHB survey said they are having trouble hiring framers. About the same percentage said they are paying more for labor and, therefore, have been trying to increase prices of their homes to defray costs.
Another headwind to a more robust housing recovery could be escalating materials costs. Crowe used a chart to show how prices for gypsum, softwood lumber, and concrete had nearly returned to their pre-recession peaks, and were significantly outpacing percentage improvements in housing starts and prices. Crowe expected this situation to prevail until manufacturing capacity, which was drastically reduced for many product categories during the recession, gets back up to speed.