Few builders would disagree that the lingering, agonizing housing recession has favored smaller, value-oriented, energy-efficient homes in close-in locations. As prices search for a bottom in former high-growth markets, most buyers today are either first-timers without a home to sell or people who must move due to a new job, divorce, or other life-changing event. Faced with brutal competition from bank sales, builders have had no choice but to get down and dirty on price, size, and location.
But that was then. Tomorrow may be very different. Foremost among the issues that face the industry today is whether more familiar and favorable dynamics will reappear as the recovery blooms. As jobs grow more plentiful, home prices rise, and consumer confidence builds, aspirational buyers may return to model centers.
To get a better handle on what's in store for the next decade, Builder convened a Housing Future Summit, soliciting ideas from more than a dozen experts. Several warned that any attempt to predict the future these days is dangerous. Most forecasts are based on historical patterns. The industry today is waist deep in uncharted waters, with record house-price deflation, persistently high unemployment, and scarce household growth. Only time will tell how these forces will affect buyer psychology.
When, If Ever, Will Housing Starts Return to Normal Levels?
Boom. That’s usually the sound of the housing industry coming out of the gate as the economy recovers from a recession. As pent-up demand is unleashed, the housing market typically grows two or three times faster than the overall economy in the first four quarters of expansion. Unfortunately, there was no starter’s gun for housing this time around. If anything, a paucity of housing activity is holding back the recovery, depressing growth.
After falling to impossible lows in the winter of 2009, housing starts had only managed to rise 26 percent through October 2010. New-home sales, seasonally adjusted and annualized, hit an all-time low of 283,000 in October. Americans just aren’t in the mood for buying new homes, and that may be because after losing 8.5 million jobs during the recession, employers have been slow to add them back. Even as profits climbed to record levels in some cases, private employers were on a pace to hire only 1.2 million new workers last year.
Despite stimulus efforts, the country still grapples with an unemployment rate in excess of 9.5 percent. One problem is that more and more people are looking for work. The U.S. population grows by 2.4 million people a year, according to Census estimates. “We need to generate 125,000 jobs a month just to stay even” with population growth, says noted author Joel Kotkin, who spoke at our symposium.
Another factor militating against a swift comeback to “normal” levels of housing starts—which most housing economists estimate is between 1.5 and 1.8 million annually—is that economic conditions have depressed household formation. Young people simply don’t have the money or the jobs to go out on their own. The latest Census data shows that only 350,000 new households were created in the year that ended last March. That’s way, way down from the 1.2 million that formed per year during the 1990s and early 2000s.
Deeper changes in personal finance, and even the psyche of American consumers, may stunt future housing demand. First, nearly one out of four households with a mortgage are under water on their home investments; they owe more on their mortgage than their house is worth. And, as John McIlwain, a fellow with the Urban Land Institute, points out, by the time the foreclosure epidemic ends, 11 million households may have lost their homes. These families won’t be in a position to buy a new home anytime soon; it takes five-to-seven years to rebuild a credit rating. In the meantime, they will have no choice but to rent. McIlwain thinks the homeownership rate, which peaked at 69 percent in 2005, may trough at 62 percent.
Several other strong undertows may pull people into rentals in the short term, McIlwain suggests. College graduates are saddled with big debts. The “bank of mom and dad” has closed due to a run on home equity, which has left parents scrambling to rebuild their retirement nest egg. “Also, young people may prefer mobility over ownership, especially if you consider 6 percent to 8 percent transaction costs of buying and selling a home over five years,” says McIlwain.
Research consistently shows, though, that a select group of Americans prefer new homes over resales. When prices and mortgage rates reverse course and start edging up, will this prime cohort storm the market, hoping to get a deal before they disappear? That’s not far-fetched—housing is more affordable now than at any time in 20 years. More than 70 percent of families making the median income in America can afford the median-priced home.
David Crowe, the NAHB’s chief economist, believes that at some point pent-up demand will drive housing production back to “normal” levels. Crowe calculates that there’s already pent-up demand of between a half million and 1.5 million households. He forecasts that it may not be until late 2013 that the industry returns to producing housing at a 1.5-million annual rate.
The Joint Center for Housing Studies at Harvard University is even more bullish. It recently estimated the need for between 16 million and 18 million new housing units over the next 10 years, though it doesn’t say in what years that demand will be met. The levels of activity would roughly equal the 17 million housing completions in the 2000s. (There were 16.1 million in the 1990s, and 17.4 million in the 1980s.) The forecast is based on immigration patterns, forecasts for household formations, the need to replace obsolete housing stock, and demand for second homes.
Michael Rehaut, a housing analyst with J.P. Morgan, notes that the current depressed level of housing starts, under 1 million for the last three years, is unprecedented in the last 50 years. “Normalized production won’t return until excess inventory subsides,” he says. When it does, he thinks the advantage will go to public builders with easy access to capital and big cash reserves, even though those builders lost share to the market from 2006 to 2009.
