Economists put stock in improving housing market, economy

Posted by Tom Kalinski Founder RE/MAX of Boulder on Monday, May 5th, 2014 at 12:53pm.

Nearly five months into 2014, economists remain optimistic that the housing market will continue to grow through 2015, according to the National Association of Home Builders (NAHB) 2014 Spring Construction Forecast Webinar.

Economists who participated in the webinar in late April said a growing economy, pent-up demand, competitive mortgage rates and affordable home prices will keep housing upwardly mobile through next year. Yet a number of obstacles – such as tight consumer credit, labor and lot shortages and rising material prices – are preventing a stronger recovery.

“Housing needs an improved economy,” says NAHB Chief Economist David Crowe.

He notes that as payroll employment continues to grow and the unemployment rate slowly recedes from 6.7 percent in the first quarter of this year to 6.2 percent by the fourth quarter of 2015, the economy is expected to respond.

The fact that consumer confidence is back to pre-recession levels, with the purchase of motor vehicles and home furnishings on the rise, indicates that consumers may be more willing to invest in big-ticket items, such as a house, the NAHB reports.

The anticipated rise of mortgage interest rates to 5 percent by the end of 2014 and 6 percent by the end of next year, reflecting an increase in credit demand and economic growth, will “not be a significant deterrent to expansion in the housing market,” Crowe says.

With new-home sales averaging just 8.8 percent of total home sales – half the historical average of 16.1 percent – Crowe observes that “this is another reason to believe that the new-home market will have to make up existing ground.”

However, he cautions that builders continue to face a number of obstacles.

“Supply constraints related to lots and labor and rising lumber, gypsum and OSB (oriented strand board) prices are hurting the ability of builders to meet demand,” he says. “Moreover, creditworthy borrowers, particularly younger families and first-time home buyers, are having difficulties in getting home loans.”

On the rise

The NAHB Remodeling Index, which averages ratings of current remodeling activity with indicators of future activity, stands at 53 in the first quarter of 2014 and has been above 50 for six of the past seven quarters. A reading above 50 indicates that more remodelers report market activity is higher (compared to the prior quarter) than report it is lower.

Here are some of the NAHB’s other forecasts for 2014:

  • Residential remodeling will post a 3.8 percent increase in 2014 over last year and rise an additional 2.4 percent in 2015;

  • New-home sales will climb 29 percent from 431,000 in 2013 to 557,000 this year;

  • Single-family housing production is projected to increase 22 percent from 621,000 last year to 760,000 in 2014 and surge an additional 55 percent to 1.18 million units in 2015;

  • Multifamily housing production will rise 8 percent from 308,000 in 2013 to 331,000 this year, reaching what is considered a normal level of production.

Banks with money to loan

Maury Harris, managing director and chief U.S. economist at UBS, agrees that the economy is on an upward trajectory and notes that financial lending institutions are sitting on a mountain of cash.

“Banks have over $2 trillion of excess reserves. That’s with a ‘t,’” he says. “Banks would like to put that money to work and increase lending, which will help the economy.”

Harris says normal household formations have fallen short by about 2.5 million as graduating college students have had to move back in with their parents and young adults were doubling up in apartments following the Great Recession.

“As unemployment comes down and credit availability eases, Millennials (the 25-34 age group) will feel better about their economic circumstances,” he says. “I think we will see the shared household rate come down, less doubling up and a pickup in household formations.”

Harris forecasts 1.15 million housing starts this year (700,000 single-family and 450,000 multifamily) nationwide and 1.35 million next year (900,000 single-family and 450,000 multifamily).

Tom Kalinski 
Owner and Founder
RE/MAX of Boulder

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