Housing Outlook Continues to Brighten but Recovery Still Faces Headwinds

January 24, 2013

The housing upturn that took root last year is expected to pick up momentum in 2013 but headwinds along a number of fronts could impede the pace of the recovery, according to economists speaking at the International Builders’ Show in Las Vegas.

“Nearly every measure of housing market strength – sales, starts, prices, permits and builder confidence – has been trending upward in recent months and we expect to see gradual but steady growth along these lines in 2013,” said NAHB Chief Economist David Crowe.

In particular, Crowe said that house prices are up nearly 6 percent on an annualized rate over the past 10 months, and that “this has been a trigger for demand to return. People feel comfortable if they buy a house that it will appreciate, not depreciate, in value.”

Other factors that bode well for the housing outlook include low mortgage rates, strong housing affordability, rising household formations and the fact that two-thirds of U.S. housing markets can now be considered improving, according to the NAHB/First American Improving Markets Index.

For the past five quarters, housing has acted as a net contributor to the economy, steadily increasing its share to 12.8 percent of economic growth in the fourth quarter of 2012.

However, Crowe cautioned that builders continue to face several challenges, including stubbornly tight mortgage lending conditions, inaccurate appraisals, rising materials prices and a declining inventory of buildable lots.

Moreover, continuing gridlock in Washington over how much more fiscal tightening is needed to stabilize the debt-to-GDP ratio, along with calls by some policymakers for major changes to the mortgage interest deduction, threaten to negatively impact consumer confidence and future housing demand.

Setting the 2000-2003 period as baseline benchmark for normal housing activity, Crowe reported that residential remodeling has returned to previously normal levels and that remodeling activity is expected to post a 2.4 percent increase in 2013 over last year.

Meanwhile, multifamily production, which has posted a 273 percent gain from its fourth quarter trough of 82,000 units in 2009 to 306,000 units in the final quarter of 2012, is expected to reach what is considered a normal level of production by 2014.

The single-family market, which has the farthest to go, was running at 44 percent of normal production in the fourth quarter of 2012. Single-family starts are expected to steadily rise to 52 percent of what is considered a typical market by the fourth quarter of this year and 70 percent of normal by the fourth quarter of 2014.

NAHB is forecasting 949,000 total housing starts in 2013, up 21.5 percent from 781,000 units last year. Single-family starts are anticipated to rise 22 percent from 535,000 last year to 650,000 in 2013, Crowe said. They are expected to jump an additional 30 percent in 2014 to 844,000 units.

On the multifamily side, NAHB is anticipating that starts will increase 22 percent from 246,000 units last year to 299,000 in 2013, and rise an additional 6 percent to 317,000 units in 2014.

Housing to Lead the Economy in 2013

Echoing many of the same concerns cited by Crowe regarding the spending and budget impasse in Washington, David Berson, senior vice president and chief economist at Nationwide Insurance, said it is still too soon to completely rule out the chance that a policy stalemate will lead to an economic downturn.

However, he said a more likely scenario is that the Administration and congressional Republicans will likely reach some type of agreement that addresses the pending deadlines concerning the debt ceiling, sequestration and continued funding for the federal government.

The House on Jan. 23 passed legislation to eliminate the nation’s statutory borrowing limit until May. The bill did not include dollar-for-dollar spending cuts that Republicans once insisted would have to be part of any debt limit bill. Democratic leaders in the Senate said they would accept the House measure without changes. A Senate vote is expected as soon as next week.

Berson projected GDP growth of 2 to 2.5 percent this year, with slower first quarter growth in response to the unresolved spending issues before the economy picks up modestly as the year progresses. If the full spending sequester is triggered and $85 billion in defense and non-defense cuts is implemented this year, then 2013 growth could fall to 1 to 2 percent.

If a relatively positive outcome occurs on the spending debates in Washington, Berson said this will pave the way for the housing and auto industries to lead the economy in 2013. Low mortgage rates, steady job growth, stronger household formations and widespread house price gains over the past year are all positive for home sales.

At the same time, in places where buyers are ready to go forward with a purchase, persistently tight mortgage credit standards continue to limit the number of creditworthy borrowers from entering the housing market, he said.

“The problem is mortgage lending standards are way too tight,” he said. “If we were at a scale of nine or 10 in 2005-2006, we are at a two today. We want to be around a five.”

Moreover, Berson noted that several federal agencies will be releasing final rules later this year on a national qualified residential mortgage standard that could further restrict mortgage lending. Low Mortgage Rates Drive Housing Demand

Qualified buyers who gain access to credit will find affordable home loans, according to Frank Nothaft, chief economist at Freddie Mac. He said that 30-year, fixed-rate mortgages will stay below 4 percent through the end of 2013.

“An important stimulant driving housing demand has been declining mortgage rates,” said Nothaft. “These are the lowest rates we have seen in 65 years.”

The refinance boom for single-family homes associated with low mortgage rates is expected to continue this year but gradually taper down. While overall mortgage originations are forecast to fall 15 percent in 2013, Nothaft said that home purchase originations will be trending higher, thanks to a projected 8 percent increase in home sales this year.

U.S. house prices increased 4 percent between September 2011 and September 2012, according to the Freddie Mac House Price Index, and this included price hikes in 42 states. By comparison, home price appreciation only occurred in a handful of states during 2010-2011.

Nationwide home prices are expected to rise 2 to 3 percent in 2013, added Nothaft. With the oversupply of vacant homes at their lowest level in a decade, this will further ease downward price pressure.

Rental vacancy declines have occurred in most markets since 2010 and U.S. apartment values are up about 8 percent over the past year. This has led to an increase in rental rates, but rents still remain relatively low adjusted for inflation, said Nothaft.

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