The rough ride is going to continue for another year or so for homebuilders, economists agreed at the National Association of Home Builders (NAHB) spring construction forecast conference late last month. But after that, a much more favorable scenario is expected to emerge.
“I’m confident that everything seems to be falling into place for a better economy and a better housing market,” Mark Zandi, chief economist at Moody’s Analytics, told the web-based session. “By this time next year, things are going to pop and we are going to see a rapid recovery.”
When Zandi spoke at the NAHB’s annual spring meeting six years ago, he drew angry stares from the NAHB’s then–chief economist, David Seiders, when the Moody’s economist said the housing market was about to implode. At the time, builders and the rest of the residential construction sector were selling houses at a record pace, and Seiders didn’t like the idea of anyone raining on his members’ parade.
This time, though, Zandi’s decidedly upbeat forecast was seconded by Seiders’s successor, David Crowe. “Momentum will begin to build as we get into 2012,” Crowe predicted. “And by the end of the year, we should be back to where we were at the beginning of 2007.”
Zandi said the “really good news” in his forecast is that demand will increase faster than supply because the infrastructure for building is “pretty significantly impaired,” a point that Crowe also stressed. That the current rate of housing starts is “dramatically off any kind of normality” is a direct result of builders’ inability to get funding to buy land, develop it, and build homes, the NAHB forecaster said.
According to the NAHB, starts should be running at about 1.5 million a year, based on current needs. But in actuality, they are at less than a third of that. “Most states are underproducing,” Crowe said, adding that many jurisdictions have a deficit greater than a normal year’s supply.
Noting that the inventory of new homes is only 2,000 units above the record low of 183,000 recorded in 1967—and only 78,000 of those are completed and ready to be occupied—the NAHB’s chief economist said pent-up household demand is awaiting the recovery. As many as 2 million unformed households—Crowe called them “shadow buyers”—are ready to split from their roommates or move out of Mom’s basement, he said. “The underlying demographics call for more production.”
Zandi said that while “there [are] no good data on household formations, which is the most important number on the planet,” he is confident there’s “a lot of juice” ahead for the next decade, as builders work to make up for the current lack of supply.
The bad news, though, is that the real estate bust will last at least 12 more months, and maybe a tad longer than that for the upswing to begin.
The NAHB projects that single-family starts will total 471,000 this year, the same number as 2010. But Crowe is predicting a 51 percent jump next year, to 698,000. Apartment builders, meanwhile, are expected to put up 140,000 units this year, an increase in production of 23 percent from 114,000 units in 2010. And next year, Crowe is looking for a slightly larger 25 percent gain, to170,000 units.
However, both he and Zandi agreed that the uptick will build slowly because, as the Moody’s economist put it, the market is “awash in excess inventories.”
Zandi said the gap between the current level of vacant homes for sale, for rent, or being held off the market and the “actual number you’d expect to see in a well-functioning housing market” is roughly 1 million units. For the most part, though, the excess is “very highly concentrated” in Arizona, California’s Central Valley, Florida, and parts of the Midwest.
“There’s more work to do” with regard to the excess inventory, the economist said. “But we’re making progress. It will remain uncomfortable for the next 12 to 18 months. But once we reach the other side of the bulge, things are looking really good.”
Another factor weighing heavily on the market is ever-falling house prices. Zandi thinks that when all is said and done, values will have dropped 35 percent, peak to trough, over what will eventually go down in the record books as a six-year nosedive.
In most parts of the country, though, houses already are priced correctly, the Moody’s economist added. “House prices have fallen sufficiently on a price-to-income and price-to-effective-rent basis, so the market is appropriately priced,” he told the webinar.
That’s not to say that prices won’t decline further in some places, he added. But for the most part, that will be the result of sellers who are “overshooting,” he said, which is why investors are still in the market digging for bargains.
Crowe, meanwhile, noted that although prices appear to be weakening, they are not necessarily falling at all when distress sales are removed from the equation. The house-price-to-income ratio, which reached an all-time high of 4.7 in late 2005–early 2006, is now at 3.3, which is “pretty much back down” to the historical 3.2 level, he also pointed out.
According to Robert Denk, assistant vice president for forecasting and analysis at the NAHB, while there are “a few places” where house prices are still too high relative to income, prices in many others have overcorrected.
Denk, who also took part in the webinar, noted that although prices in about a third of the country declined between last year’s third and fourth quarters, the median rose in more than half the states. And like the other two speakers, he pointed out that foreclosures are heavily concentrated in California, Florida, New York, and Texas. Foreclosures “are a problem everywhere,” he said, “but the ‘crisis’ is in only a handful of states.”