“Housing is finally doing its job in leading the economy out of recession,” said David Crowe, the chief economist of the National Association of Home Builders (NAHB), who spoke at the Washington, D.C.–based association’s convention in Las Vegas on January 22. “It’s taken three and a half years for that to happen, but it is happening.”
While there have been signs that the housing market was improving last year, Crowe said. “But the recovery is now a lot more solid and in a lot more places.” About two-thirds of the nation’s 300-plus housing markets are in recovery mode, he added.
For 2013, the NAHB economist expects single-family housing starts to rise 22 percent, from 535,000 last year to 650,000 this year, and 30 percent in 2014 to 844,000.
That’s still significantly short of the 1.4 million starts the NAHB considers “normal.” But if the new-home sector were to expand any faster, Crowe said, builders would run into supply and labor shortages that would drive prices too high, too fast.
Re-creating the construction delivery infrastructure is “already an issue in the more robust markets,” he said, which is why building material prices have soared to the top of the list of builder concerns.
Nevertheless, housing—which normally accounts for about 3.5 percent of GDP—is currently adding 13 percent to growth.
The NAHB economist told reporters “a couple of things” happened last year that will provide a springboard for 2013: prices on a national basis have moved up “rather nicely” at about a 6 percent annual rate, and household formations finally started to blossom.
Crowe said that although national numbers are all but useless because all housing activity is local, a jump snags the media’s attention, which, in turn, is gobbled up by consumers. And “the current recovery,” he said, “is now broad enough and of sufficient enough size to affect the national figures.”
More important, though, is the fact the news tends to trigger even more demand, and “that’s what’s been missing,” he added. “People feel more comfortable about appreciation. And while there may be a few hiccups here and there, we think appreciation will continue.”
Household formations dropped from 1.4 million a year during the housing boom to 500,000 at the bottom of the recession. But over the last four quarters, they have been running at about 850,000 on an annual basis, as people in the 25- to 34-year-old age bracket move out of their parents’ basements or away from roommates to form their own households.
Though that age cohort has typically been the group of people who purchase their first home, the jump in household formations has largely been a stimulus for apartment construction, if only because many young people have been unable to save for a downpayment, their credit is not good enough to meet today’s rigid lending standards, or they are underemployed.
“Many will eventually become homeowners,” the NAHB economist said, “but not until 2014 or 2015.”
On the multifamily side, Crowe said, the forecast also is “good,” though growth in apartment starts is subsiding. His forecast is for 299,000 starts this year—a 22 percent gain over the 246,000 units begun in 2012—and 317,000 units in 2014, which would be an annual increase of just 6 percent.
Crowe said the apartment market is moving closer to equilibrium when 350,000 starts are enough to keep supply and demand in sync. But Lance Swank, president of the Sterling Group, a longtime developer of both affordable and market-rate apartments in the Midwest and Southwest, thinks Crowe’s multifamily forecast is too low.
“We see a golden age for multifamily,” the Mishawaka, Indiana–based builder said. “With 10 million people prone to rent over the next decade, 350,000 units a year is not enough” to cover the spread.
Other economists on the podium with Crowe tended to bolster his reasoning. Demand has been the missing stimulus, said Frank Nothaft, chief economist at Freddie Mac. And though would-be buyers are “still somewhat cautious,” he said that rising home values over the next 12 months will push buyers forward before house prices and mortgage rates move any higher.
David Berson, chief economist at Nationwide Insurance and a former Fannie Mae chief economist of 20 years, said that any of three unsettled budget issues in Washington—the debt ceiling, sequestration, and funding government functions—could short-circuit the housing recovery, cutting economic growth in half.
But, Berson said, if lawmakers solve those issues, household formations will be “the real key” going forward.
“Every household has to live somewhere; this is pent-up demand,” he said. If the economy continues to pick up steam, “the housing market is poised to pick up significantly over the next three to five years as employment improves.”
David Crowe, chief economist at NAHB, will be speaking at the ULI Terwilliger Center's Housing Opportunity 2013 conference in Seattle, WA March 20-22. To learn more about the event and to register click here.