ORLANDO – With hardly anywhere else to go but up, the National Association of Home Builders’ predicts a 21% increase in single-family housing starts this year. But because the key indicator of the strength of the new home sector is starting at such a low point, the NAHB’s chief economist, David Crowe, warned, such a big percentage jump will not result in much of an improvement.
“We’re starting from a soft spot,” Crowe reminded reporters at the group’s annual convention last week, noting that the second half of 2010 was “much poorer” than the first six months. “We’re coming off such a low base that the market will still be only half of what it should be.”
Those sentiments were echoed by Frank Nothaft, Crowe’s counterpart at Freddie Mac, who said a 20% gain in housing starts is nothing to crow about, at least not under current market conditions. “If you were building 50 houses annually a few years back but put up just ten houses last year,” he pointed out, “a 20% gain means you will build only 12 houses this year.”
However, a third economist, Edward Sullivan of the Portland Cement Association (PCA), said Crowe and Nothaft’s less-than-stirring projections were too optimistic. Sullivan told a separate convention briefing he doesn’t expect any significant increase in housing starts this year. “Twenty-twelve is the year we’re going to start to see a recovery, not this year,” the PCA’s chief economist said.
Sullivan isn’t as well known as either Crowe or Nothaft, but portland cement is a basic ingredient of concrete, a key building material. And as such, producers watch his forecasts with the same vigor as builders follow Crowe’s and as lenders track Nothaft’s.
Sullivan said job growth will be modest at best this year, lending standards will remain tight and foreclosures will continue to grow. These three factors, he added, form a “powerful combination” that will keep builders from once again putting their shovels in the ground to any great degree. “The only reason to build is to make money,” the PCA economist said. “And builders can’t do that right now.”
But Crowe said 2011 will definitely be a better year for builders, if only because of the underlying demographics. “There’s enormous pent-up demand,” he said, noting that some two million households that should have formed over the last few years failed to do so. “The population should have given us two million more households than it did,” the NAHB’s chief economist explained. “And they are out there waiting to be the next ones into a new house or apartment.”
Crowe also predicted that economic and job growth will both improve as the year goes on. Freddie Mac’s Nothaft agreed, saying that “a less than exuberant opening to 2011 does little to dampen our expectations that the recovery will continue to gather strength as the year goes on.”
The NAHB is projecting that builders will produce 575,000 single-family houses this year, up from an estimated 475,000 in 2010. And it expects single-family starts will reach 860,000 in 2012. “I’m comfortable we’ll see a pick-up [in starts] if only because the bottom can’t be any lower,” the group’s chief economist said.
Freddie Mac also is expecting a 20% gain in starts, and Nothaft said the coming spring home-buying season is shaping up to be a good one — at least as strong, he suggested, as last year when purchasers were rushing to take advantage of the home buyer tax credit.
The Freddie Mac economist said there were several reasons for his optimism. Besides the expected increase in household formations, he said, affordability is “at an extremely high level” and housing prices are at or near their low point for the cycle. Prices will finally bottom out in 2011, “maybe as soon as the spring,” he said. “And by 2012, they should be showing gradual improvement.”
However, the PCA is looking for just 492,000 single-family starts this year and 690,000 in 2012. While Sullivan said he accepts his counterparts’ rational for improvement, he argued that their timing is off because foreclosures will lead to rising inventories, which in turn will serve to depress prices still further, thereby offsetting any gains in job growth or affordability.
“Recovery is a long process,” the PCA economist warned. “It’s not going to happen overnight.”