Builder Economists Push Back the Bottom of the Housing Market…Again

The Wall Street Journal

8 February  2012

ORLANDO — Every year around this time, tens of thousands of housing industry professionals gather at the National Association of Home Builders’ convention, usually held in Florida, to talk shop and network with other builders, marketers and suppliers.

One of the best-attended educational sessions at the International Builders’ Show is the economic outlook talk hosted by the NAHB’s chief economist, David Crowe. This year, he was joined by Freddie Mac Chief Economist Frank Nothaft and David Berson, chief economist with mortgage insurer PMI Group, to discuss their predictions for the economy, and the tone was what one might call penitent optimism.

Why penitent? Because last year, Mr. Crowe called the bottom of the new-home market, and he was off in a big way. For 2011, Mr. Crowe predicted that single-family housing starts would tick up to 575,000 and new-home sales would rise to 405,000. Instead, both of those figures fell to all-time lows, with builders starting only 428,600 new single-family homes, and sales clocking in at a dismal 302,000, according to the Commerce Department.

This year, the trio of economists sounded a more cautious tone. Mr. Crowe predicted a 16% improvement in 2012 for both new-home sales and single-family starts. Moreover, they were able to point to improvements in several economic indicators: GDP growth, unemployment rate, private-sector job-creation, and consumer sentiment. One issue they all agreed upon is that household formation has got to go up in order for the new-home market to improve, and that’s likely to happen in the next year.

“Of course, as we know, the real savior of housing is demographics,” Mr. Crowe said, citing a pent-up demand for 2 million homes by households that are doubled-up or waiting to buy a home, according to NAHB estimates. Those potential homebuyers or renters “are in mom’s basement, and let me tell you, that’s not a sustainable lifestyle, not for mom, and not for them.”

Mr. Nothaft, of government-sponsored mortgage giant Freddie Mac, started his talk by pointing out the high level of affordability that exists today. Forecasting that mortgage rates will rise to just over 5% by the end of 2013, he expressed sympathy with the frustrations felt by the builder community.

“If I put this affordability into a model, I would have home sales through the roof! But as we know, they’re not through the the roof,” he said. The reason is serious “headwinds” facing the industry, including sapped consumer confidence, more than 400,000 excess unsold homes at the end of 2011, and a still-high jobless rate. The good news, though, is that “in the first half of 2012 we’ll see a lot of the [unsold] inventory bottom out.” Another year, another bottom called.

Mr. Berson, of PMI Group, also focused on household formation as a key number to watch in 2012. He predicted an average of about 1.1 to 1.2 million housing starts per year over the next 10 years — which would be close to what economists consider a “healthy” level of construction — minimal growth in second and vacation homes, and a strong household growth in the South, Great Plains and Rocky Mountain states. He cited numbers showing that between 2007 and 2011, the number of households that are “doubled up,” or have grown children or other potential household heads living with their relatives in the same house, grew from 20 million to 22 million. About 6 million of these housemates are young adults aged 25-34 living with their parents.

“They don’t want to live with you. You don’t really want them living with you,” Mr. Berson told the mostly middle aged and older audience. “They will move out as fast as they can. Unless you make it easy for them [to stay]. Don’t make it easy for them. Help your other home builders kick them out.”

One way builders have been trying to do that is by “right-sizing” their homes, or building smaller, more efficient dwellings that are more appealing the supposedly more urban-minded and environmentally conscious young buyers, who are referred to as “Generation Y” or the “echo boomers.” In fact, many of educational sessions at this year’s IBS show are devoted to how to design homes that are more appealing to Gen-Y buyers.

Another common trend in new home design that is the focus of this year’s show is multi-generational housings, or building homes that have separate rooms or wings for grandparents, in-laws, and recent college grads in search of a crash pad, a design trend that seems to run counter to builders’ goal of selling as many new homes as possible to as many new households as possible.

But Mr. Berson argued that multi-generational housing is short-lived as a trend. “In three or four years there will be a lot less emphasis on multigenerational housing.”