A strengthening labor market, low interest rates, improving mortgage availability and growing pent-up demand will help to significantly boost single-family housing production in the year ahead and move the housing recovery to higher ground, according to economists speaking at the International Builders' Show in Las Vegas today.
With economic growth near 4 percent for the last half of 2014 and employment gains averaging more than 250,000 per month last year, NAHB Chief Economist David Crowe said these are the primary factors that have helped consumer confidence jump back to pre-recession levels.
"The signs point to a more robust year for housing," Crowe said. "Household balance sheets are returning to normal levels, home owners' equity is increasing and significant pent-up demand is rising. More than 7 million existing home sales were postponed or lost during the downturn; and while some are lost forever, we should see some catch-up."
NAHB is projecting 993,000 total housing starts in 2014, up 6.7 percent from last year's total of 930,000 units.
Single-family production is expected to rise 26 percent in 2015 to 804,000 units. "While a good beginning, this is still well below a normal level of 1.3 to 1.4 million single-family starts," Crowe said.
On the multifamily front, NAHB is anticipating 358,000 starts in 2015, up 2 percent from 352,000 last year.
The sale of new single-family homes is expected to hit 564,000 this year, a 29.3 percent increase above last year's 436,000 in sales.
Meanwhile, residential remodeling activity is expected to register a 3 percent gain this year over 2014.
The ongoing housing recovery will see single-family starts steadily climb from 49 percent of normal production at the end of the third quarter of 2014 all the way up to 90 percent of normal by the end of 2016, Crowe said. Examining the recovery on a state level, by the end of 2016, the top 40 percent of states will be back to near normal production levels, compared to the bottom 20 percent, which will still be below 75 percent.
Where are All the New Households?
David Berson, chief economist at Nationwide Insurance, said the number of new household formations was far fewer in the current economic expansion than in previous recoveries.
"Give the job growth we've seen in 2014, there should have been better household formations," he said, adding that the slower pace may be because "the real acceleration in job growth has occurred just recently - in the last six months."
As the economy and job growth continue to strengthen in 2015, Berson said this will be a "significant factor to encourage people who have doubled up to move out on their own."
Moreover, he noted that the real slowdown in household formations has come from the Millennials, who have suffered disproportionately from stagnant wage growth and student debt. However, he added that this key demographic is getting older and ready to set down roots. "The leading edge are now in their young 30s," said Berson. "Homeownership desire is much higher for those who are in their 30s than those in their 20s."
A Rising Economy Lifts Housing
Freddie Mac Chief Economist Frank Nothaft also foresees a good year for housing.
"We're projecting 3 percent economic growth in 2015, which would only be the second year in the last decade that we've seen growth at that level," said Nothaft. "A stronger economy supports a rise in household formation and home buying."
Not quite as bullish as NAHB, Nothaft expects that housing starts will rise about 15 percent in 2015, and that home sales will be up 4 percent, which would be the best year for home sales since 2007. He added that nationwide home prices this year should increase about 3.5 percent to 4 percent above last year's level.
With 30-year mortgages currently running at about 3.75 percent, Nothaft called them "dirt cheap" and said he expects rates to rise this year but remain at affordable levels.
"If we see economic growth running at 3 percent at an annualized, rate, the Federal Reserve should begin to push up short-term interest rates by the second half of 2015," said Nothaft. "We see mortgage rates going up to 4.5 percent on the high side at the end of this year, going from dirt cheap to cheap. Overall, affordability for buyers in most markets will be well maintained in the context of strong job and income growth."