Home construction will be up, but hurdles remain

By Catherine Kavanaugh
Staff Reporter

Published: February 5, 2014 2:10 pm ET
Updated: February 5, 2014 5:33 pm ET

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Topics Construction, United States

LAS VEGAS -- Not only will the U.S. home construction market continue its rebound in 2014, but the most optimistic forecasters predict 822,000 starts -- about 200,000 more than last year -- and spending on remodeling projects to outpace its 2007 peak.

Some of this good news for builders and suppliers comes from David Crowe, chief economist for the National Association of Home Builders, who was part of a panel discussion Feb. 4 at the International Builders Show in Las Vegas.

Crowe acknowledged that his single-family forecast is aggressive.

"My first defense is that we've done it before," he said, pointing to housing starts which increased by 190,000 to 400,000 in 1976, 1983 and 1992, which were all years following recessions.

The indicators for a strong uptick are there, Crowe added, citing a rise in consumer confidence and a strong need for new housing coupled with a low inventory of existing homes.

"The turnover rate was about 7 percent in the peak. It's only about 4 percent right now so existing home owners are reluctant to roll over. Hence, the only way to satisfy that demand is new homes," Crowe said.

However, his rosy outlook was peppered with some cautions by colleagues. David Berson, chief economist for Nationwide Insurance, talked about constraints in household formations due to young adults not leaving the nest and elderly parents moving in with middle-age children.

"Theres a doubling up going on," Berson said. "We probably have at least 3 million fewer households that have been formed in the last 5-6 years than we should have."

That translates into pent-up demand, which will lead to more single-family housing starts, he added, but probably not at the rate Crowe sees.

"We're not quite as optimistic as Dave but we think it will be a pretty good year for construction," Berson said.

Frank Nothaft, chief economist at Freddie Mac, sees buyer affordability at the crux of of the home construction market. He expects economic growth to increase by 3 percent in 2014, which would be the highest rate in five years,

"That should translate to additional job growth and income growth for families, and that will help support affordability," Nothaft said.

In most U.S. markets, housing has become "generally affordable," although mortgage rates are going up for 30-year fixed rates from an average of 4 3/8 percent, he said. Even so, a gradual rise to 5 percent at the end of the year or beginning of 2015 won't stop the housing rebound.

Nothaft also sees a turning point in the mortgage market, which has been dominated by homeowners refinancing their existing home loans compared to borrowing for home purchases. That's going to flip-flop, he said.

"It will be a big change in the mortgage market mix," Nothaft said. "It will be the first year purchase money will dominate since 2000, so that's a big change in the lending market."

In the home remodeling market, experts said they feel like they are in the midst of a strong healthy upturn. They estimate the size of the market for repairs, maintenance and improvements to be $310 billion.

The market shrank to $30 billion in 2011, according to Kermit Baker, a senior research fellow at Harvard University.

"We gained back about half the loss we saw in the downturn, so in the residential sector we're doing pretty well," Baker said. "In 2014, we think we'll see another healthy year -- another mid- to high-single-digit growth in terms of spending nationally. It might be enough to actually put us at our all-time high in home improvement spending. We're not doing any inflation adjustment but 2014 actually could get above that level if we have a good year."

Many factors point to positive growth, including calls for bids, amount of work scheduled and appointments for proposals, said Paul Emrath, the NAHB's vice president for survey and housing policy research.

He forecasts a 2.5 percent growth in remodeling in 2014 and 1.8 percent in 2015. That follows a 1.9 percent decline in 2013.

"We'll have solid but not spectacular growth," Emrath said. "2013 was actually unexpectedly weak. We believe we'll do considerably better going forward."

What kind of remodelers and suppliers will benefit? If 2014 is anything like last year, bathrooms will edge out kitchen for the fourth time in a row, but the biggest change will come from homeowners looking for more extreme makeovers.

"The change we've seen is in whole house remodeling," Emrath said. "That had just kind of fallen off a cliff in 2010, but it has been recovering."

Aging-in-place retrofits of houses for people age 65 and up also will keep home remodelers busy.


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Home construction will be up, but hurdles remain

By Catherine Kavanaugh
Staff Reporter

Published: February 5, 2014 2:10 pm ET
Updated: February 5, 2014 5:33 pm ET

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