Three economists told attendees at the International Builders Show that the housing market should continue to improve on an accelerating basis in 2013. But each cautioned that there are many factors, especially on the federal government level, that could still derail the recovery. The builders, meeting in Las Vegas on Tuesday, heard from David Crowe, Chief Economist, National Association of Home Builders (NAHB), David Berson, senior vice president and chief economist at Nationwide Insurance and Frank Nothaft, chief economist at Freddie Mac.
Crowe said that nearly every indicator of housing market strength, permits, prices, sales, housing starts, and builder confidence, has been trending upwards in recent months. He noted that home prices, which are up nearly 6 percent on an annualized basis over the last 10 months, are particularly important because they are a trigger for people to return to the market "People feel comfortable if they buy a house that will appreciate, not depreciate, in value," he said.
He pointed as well
to other positive indicators including low rates and strong affordability, rising
household formation and a general improvement in the economy. Housing is now
also contributing to rather than acting as a drag on the economy and increased
its share of economic growth to 12.8 percent in the fourth quarter of 2012.
Setting the 2000-2003 period as baseline benchmark for normal housing activity, Crowe ticked off other positive indicators:
- Residential remodeling has returned to previously normal levels and activity is expected to increase 2.4 percent this year.
- The hardest-hit market, single-family houses, was running at 44 percent of normal production in the fourth quarter of 2012 but should rise to 52 percent of what is considered a typical market by the fourth quarter of this year and 70 percent by the fourth quarter of 2014.
- Single-family starts are anticipated to rise 22 percent from 535,000 last year to 650,000 in 2013 and to 844,000 units in 2014.
- 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.
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. He also cited the potential that the continuing gridlock in Washington over the debt ceiling, sequestration, and the budget along with calls by some policymakers for major changes to the mortgage interest deduction, could negatively impact consumer confidence and future housing demand.
Berson echoed these
concerns and 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 multiple pending fiscal deadlines.
He told the builders he expects GDP growth of 2 to 2.5 percent this year, with slower first quarter growth in response to the unresolved federal government spending issues before the economy picks up modestly as the year progresses. However, if the full spending sequester is triggered it would cut more than $100 billion in defense and non-defense spending which could reduce 2013 growth 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; yet tight mortgage credit is limiting opportunities for creditworthy borrowers. "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." Berson also 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.
Nothaft said that those buyers who are able to access credit will find home loans at the lowest rates in 65 years. He called the declining rates an important stimulant driving housing demand and projected that that 30-year, fixed-rate mortgages will stay below 4 percent through the end of 2013.
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 and home sales will rise a projected 8 percent this year.
Prices rose in 42 states between September 2011 and September 2012 Nothaft said, and prices increased nationwide by 4 percent. They are projected to increase 2 to 3 percent in 2013 and 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 according to Nothaft.
Nothaft forecast 930,000 housing starts for 2013 and Berson said starts could hit 980,000 this year. NAHB forecasts 949,000 total housing starts in 2013, up 21.5 percent from 781,000 units last year.