The Year Ahead in Housing
Steady employment, economic growth, pent-up demand, affordable home prices, and attractive mortgage rates will keep the housing market on a gradual upward trend in 2016. How-ever, persistent headwinds related to shortages of available lots and labor are impeding a more robust recovery.
Job formation is the key to this housing recovery. Unlike previous recoveries when housing played a key role in the rebound, this recovery needs more jobs to convince consumers that the recession is over, that they will retain their jobs, their incomes will grow and that their friends and relatives feel that way too.
So far, the employment news continues to be good. There are more jobs in the U.S. than ever before at 10% above the last peak. The one caveat is that job growth has been concentrated heavily in the service sector, which tends to pay lower wages than goods producing jobs. As a result, incomes have not grown over the recovery period, although that trend is reversing in the latest reports.
Within the housing market, most new homes are sold to current home owners. That has always been true but is more striking today because the first time home buyer is less active in the housing market. The good news is that home equity has nearly doubled since 2011 and now stands at $12.5 trillion. Improved equity provides a down payment for existing home owners to buy a new home.
While mortgage interest rates should rise over the near-term, averaging 4.5% in 2016 and 5.5% in 2017, this is not expected to have an impact on the housing recovery. As the economy gets better, job and wage growth should keep pace. So even though mortgage rates will rise, they will still be low by historical standards and very affordable.
Two supply chain headwinds will make housing’s recovery more difficult. Builders cannot find enough skilled labor and developed lots are scarce. In successive NAHB member surveys, 13% of builders said the cost and availability of labor was a significant problem in 2011; that concern jumped to 61% in 2014. About a fifth of builders shared the same concerns regarding lots in 2011; that ratio shot up to 58% in 2014. Rising wages for construction workers will help alleviate the labor shortage. Better access to bank loans will help developers buy and prepare lots.
NAHB is projecting 713,000 single-family starts in 2015, up 10% from the 647,000 units produced last year. Single-family output is projected to rise an additional 23% in 2016 to 875,000 units.
In multifamily, production ran at 354,000 units last year, slightly above the 331,000 level considered normal. Multifamily starts are expected to rise 12% to 396,000 units this year and post a modest 3% decline to 382,000 units in 2016.
Residential remodeling activity is forecasted to increase 6.8% in 2015 over last year and rise an additional 6.1% in 2016.
Housing market conditions are improving in all regions, but the pace of recovery continues to vary by state and region. It now is really a matter of markets reconnecting to the fundamental drivers, and that is employment. Production is rebounding in all regions, prices are moving up, and new foreclosures are back to more normal levels.
Using the 2000-2003 period as a healthy benchmark when single-family starts averaged 1.3 million units on an annual basis, NAHB projects that single-family production, which bottomed out at an average 27% of normal production in early 2009, will climb to 74% of normal by fourth quarter 2016 and to 91% of normal by the end of 2017. Single-family output now stands at 53% of normal activity.
Among the hardest hit areas during the downturn, the bubble states—California, Arizona, Nevada and Florida—had the most excessive price and production spikes, while the industrial Midwest experienced problems more related to fundamental economic weakness.
The most successful recoveries are happening now in the energy states, including North Dakota, Wyoming, Texas, Montana and Louisiana. Others showing strong employment and housing growth include South Carolina, Utah, Tennessee, Idaho, Oregon and North Carolina.
As employment gains become broader, as pent-up demand from existing homeowners and first-time buyers return kicks in, and as more labor becomes available, the recovery will continue.
David Crowe is chief economist for the National Association of Home Builders.