An uptick in the number of single-family permits – which is currently only 44 percent of normal activity – is the key to a full-fledged housing recovery.
Single-Family Production Poised to Soar in 2015
A growing economy, rising household formations, low mortgage rates, and pent-up demand will help single-family housing production rev up in 2015 while a growth in renters will keep the multi-family market at cruising altitude or higher, according to economists who participated in the National Association of Home Builders (NAHB) 2014 Fall Construction Forecast Webinar.
“Single-family builders are feeling good. They are not overly confident, but confident enough to keep moving forward,” notes NAHB Chief Economist David Crowe. He adds that the single-family sector will finish out 2014 much stronger than it began and set the stage for a robust 2015.
“This is mostly due to significant pent-up demand and steady job and economic growth that will allow trade-up buyers who have delayed home purchases due to job insecurity to enter the marketplace,” Crowe explains.
The NAHB is forecasting 991,000 total housing starts in 2014, up 6.6 percent from 930,000 units in 2013. Single-family production is expected to rise 2.5 percent this year to 637,000 units and increase an additional 26 percent in 2015 to 802,000 and reach 1.1 million in 2016.
Setting the 2000-2003 period as a benchmark for normal housing activity when single-family production averaged 1.3 million units annually, single-family starts are expected to steadily rise from 48 percent of what is considered a typical market in the third quarter of 2014 to 90 percent of normal by the fourth quarter of 2016. Multi-family starts, which Crowe reports are now at a normal level of production, are projected to increase 15 percent in 2014 to 356,000 units and hold steady in 2015.
Meanwhile, the NAHB Remodeling Market Index, which averages ratings of current remodeling activity with indicators of future activity, matched its all-time high of 57 in the third quarter of 2014 and has been above 50 for six consecutive quarters. A reading above 50 indicates that more remodelers report market activity is higher (compared to the prior quarter).
The NAHB is forecasting that residential remodeling will post a 3.4 percent decline in 2014 over last year, due in large part to slow activity in the first quarter caused by an unusually harsh winter throughout much of the nation. Residential remodeling activity is expected to rise 2.7 percent in 2015 and an additional 1.3 percent in 2016.
Taking an even more bullish outlook, Mark Zandi, Chief Economist at Moody’s Analytics, says that prospects are good for continued gains in overall economic and housing activity. “The reason is that job growth is quite strong,” Zandi remarks. “Currently, we are creating about 225,000 jobs per month, or 2.75 million per year. That is double the pace necessary to reduce unemployment and under-employment, which augers very, very well for housing demand and the housing market more broadly.” With the current supply of housing running just over 1 million units on annualized basis, Zandi states that this figure is well below what is needed for the longer run.
In the aftermath of the Great Recession, new household formations were depressed as the number of Millennials living with their parents or doubling or tripling up in apartments soared to about 3 to 4 million above normal, according to Zandi. As the economy continues to improve and these 18- to 34-year-olds begin to form their own households, this will boost overall demand for new housing construction.
“In a normal year, there should be demand for 1.7 million units,” he comments, adding that each single-family home generates about 3.5 jobs over the course of a year and every multi-family unit produces 1.5 jobs over the same period.
Taking this one step further, Zandi notes that increasing the housing stock by 700,000 units to meet this unmet demand would create 2.1 million jobs, which “would reduce unemployment by 1.5 percentage points.”
By the end of 2017, Zandi expects mortgage rates to rise from their current rate of about 4 percent back to their “equilibrium” of 6 percent, which he noted would be very consistent with a solid job market and solid housing market. “The housing market will be fine because of better employment, higher wages, and solid economic growth, which will trump the effect of higher mortgage rates,” he explains, adding that single-family starts could be closing in on 1 million units by the end of 2015 and multi-family production could go as high as 500,000 units.
Delving beneath the national numbers, Robert Denk, NAHB’s Assistant Vice President for Forecasting and Analysis, notes the housing recovery will vary by state and region. “We are getting back to the point where economic conditions are dictating the strength of local housing markets,” Denk comments. “It is very clear that those states with higher levels of payroll employment or labor market recovery are associated with healthier housing markets.”
Energy-producing states – North Dakota, Texas, Louisiana, Montana, and Wyoming – where job growth is strong are also at the forefront of the housing recovery, while Iowa and other farm belt states supported by agricultural commodities are also running above the nationwide average.
Meanwhile, states such as Nevada, Arizona, New Mexico, Alabama, Rhode Island, and New Jersey that are coping with weak labor markets are also struggling to get their housing activity back on track.
Housing nationwide bottomed out at an average of 27 percent of normal production in early 2009 and the gradual and steady housing recovery now underway nationwide will bring single-family housing starts to 68 percent of normal by the fourth quarter of 2015 and 90 percent of normal by the end of 2016.
In another way of looking at the long road back to normal, by the end of 2016 the top 40 percent of states will be back to normal production levels, compared to the bottom 20 percent, which will still be below 75 percent.
Remodeling Industry Reports Strong Growth
The National Association of the Remodeling Industry’s (NARI) third-quarter Remodeling Business Pulse (RBP) data of current and future remodeling business conditions indicated strong growth in the third quarter of 2014 with a rating of 6.41. According to the research, quarter-over-quarter increases are evident in all sub-components measuring remodeling activity. This is the second quarter of growth in 2014, coming on top of June’s strong increase over the 6.07 recorded in March.
All of the sub-components in the third quarter increased, with “conversion from bids to jobs” showing the strongest gain by 3 percent. (Rating is from 1 to 9, where 1 is much worse than one year ago and 9 is much better; 5 is about the same as last year).
Among the statistics provided are:
? Business conditions increased to 6.41
(from 6.29 last quarter)
? Number of inquiries increased to 6.51
(up from 6.38 last quarter)
? Requests for bids rose to 6.41
(from 6.29 last quarter)
? Conversion of bids increased 6.01
(from 5.83 last quarter)
? Sales value of jobs improved to 6.27
(up from 6.20 last quarter)
“This is indicative of the slow, steady recovery of the remodeling industry,” says Tom O’Grady, CR, CKBR, chairman of NARI’s Strategic Planning Committee. “Currently 67 percent of remodelers are seeing growth and are confident that the market is improving, which is in line with market indicators.”
As a driver of the future, economic growth had a 10-percent point increase this quarter rising to 57 percent – up from June’s rating of 47 percent – moving it to the number two position. Postponed projects remain the top driver at 74 percent, although it is down 6 percent from the 2nd quarter.
The survey also explored homeowner financing of projects, which fell between Neutral and Difficult in obtaining the funds. The biggest barrier to financing – at 38 percent – was the financing company being overly cautious, followed by the project being too expensive relative to the home’s value at 27 percent. Poor credit history was only selected as an issue by 11 percent of the respondents. A bank or credit union was the main source for financing – at 72 percent – if cash or a check was not used. Credit card – the number 2 choice – was utilized at only 20 percent.
Housing Markets Inch Toward Full Recovery
Markets in 59 of the approximately 350 metro areas nationwide returned to – or exceeded – their last normal levels of economic and housing activity in the third quarter of 2014, according to the National Association of Home Builders (NAHB)/First American Leading Markets Index (LMI), released last month.
This represents a year-over-year net gain of seven markets. The Index’s nationwide score moved up slightly from .89 in the second quarter to .90, meaning that based on current permit, price, and employment data, the nationwide average is running at 90 percent of normal economic and housing activity. Meanwhile, 66 percent of markets have shown an improvement year-over-year.
“The markets are recovering at a slow, gradual pace,” says NAHB Chairman Kevin Kelly, a home builder and developer from Wilmington, Delaware. “Continued job creation, economic growth, and increasing consumer confidence should help spur pent-up demand for housing.”
Baton Rouge, La., continues to top the list of major metros on the LMI, with a score of 1.39 – or 39 percent better than its last normal market level. Other major metros leading the list include Austin, Texas; Honolulu; Oklahoma City; and Houston. Rounding out the top 10 are Los Angeles; San Jose, Calif.; Salt Lake City; New Orleans; and Charleston, S.C. — all of whose LMI scores indicate that their market activity now equals or exceeds previous norms.
“An uptick in the number of single-family permits – which is currently only 44 percent of normal activity – is the key to a full-fledged housing recovery,” notes NAHB Chief Economist David Crowe. “In the 17 metros where permits are at or above normal, the overall index shows that these markets have fully recovered.”
“Nearly half of all the markets on the Leading Markets Index are up since August, which is a good sign that the ongoing housing recovery will keep moving forward in 2015,” states Kurt Pfotenhauer, Vice Chairman of First American Title Insurance Company, which co-sponsors the LMI report.
Looking at smaller metros, both Midland and Odessa, Texas boast LMI scores of 2.0 or better, meaning their markets are now at double their strength prior to the Recession. Also leading the list of smaller metros are Grand Forks and Bismarck, N.D.; and Casper, Wyo., respectively.
The LMI shifts the focus from identifying markets that have recently begun to recover – which was the aim of a previous gauge known as the Improving Markets Index – to identifying those areas that are now approaching and exceeding their previous normal levels of economic and housing activity. More than 350 metro areas are scored by taking their average permit, price, and employment levels for the past 12 months and dividing each by their annual average over the last period of normal growth. For single-family permits and home prices, 2000-2003 is used as the last normal period; for employment, 2007 is the base comparison. The three components are then averaged to provide an overall score for each market; a national score is calculated based on national measures of the three metrics. An index value above one indicates that a market has advanced beyond its previous normal level of economic activity. In calculating the LMI, NAHB utilizes employment data from the Bureau of Labor Statistics, house price appreciation data from Freddie Mac, and single-family housing permits from the U.S. Census Bureau. ?
