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Pent-up demand could ignite housing rise

By: Catherine Kavanaugh

February 28, 2014

LAS VEGAS — The number of college graduates boomeranging back to live with their parents and senior citizens moving in with their middle-age children has been hindering the housing market for years.

(And probably some couples who were looking forward to turning that extra bedroom into an office or workout room.)

At least 3 million fewer households formed in the last six years compared to the period prior to 2007.

However, economists see signs that young adults will leave the nest for good and older adults will age in place somewhere independently.

The number of household formations is slowly inching out of the basement along with a generation of 20-and 30-somethings dogged early in their careers by high unemployment, college debt and lower wages.

Eventually, quite possibly in 2014 and 2015, it will bode very well for home builders and all the businesses that supply materials from polystyrene insulation to vinyl windows and doors to polymer roof shingles.

"From the beginning of The Great Recession on we have created households at a much slower rate than we have historically and at a much slower rate than the age of the population suggests we should, and we have created pent-up demand for households," said David Berson, chief economist for Nationwide Financial.

Although he doesn't expect new housing starts to hit the 882,000 mark in 2014 as do his more optimistic colleagues, Berson said, "I think it will be a pretty good year for construction. We certainly will see a big increase in single-family starts and I think multis won't change much."

Berson was part of a Feb. 4 panel talk about the 2014 housing outlook at the International Builders Show in Las Vegas. He said household formations have been very weak, mostly from the "doubling up" of families pooling resources to make it through tough economic times.

"Not only has job growth been slow but the jobs that have been created have not been terribly high income-producing jobs," Berson said. "Once we get a stronger job market — more jobs being created and stronger income growth — then we should see household formations come back."

Labor market trends remain positive despite a weaker-than-expected jobs report in December. Job growth slowed sharply to 74,000 but many expect the figure to be revised higher.

The national unemployment rate dropped to 6.7 percent in December and then to 6.6 percent in January, when non-farm payroll increased by 113,000.

Add to that still-low mortgage rates and Berson said, "We will see a pickup in housing demand and housing construction from some of these households that just weren't formed. The question is: When will that occur? We had hoped it would occur already."

In 2013, household formations nudged up a meager 0.39 percent, accounting for a 449,000 household gain — the slowest since 2008. Today, there are about 114,830,000 U.S. households.

"Every household has to live somewhere," Berson said. "They may own. They may rent. They either take up space in terms of an empty unit that gets filled or a unit constructed for them but it adds to demands for housing."

Single-family rebound

David Crowe, chief economist for the National Association of Home Builders, sees single-family housing starts increasing from 621,000 in 2013 to a forecasted 822,000 in 2014. To him, home construction in this sector is on the verge of returning close to its "normal" rates of the 1.3 million starts posted in 2000-03. Crowe predicts 1.16 million starts in 2015.

"The consumer is much more on board now," he said. "The sentiment surveys and attitudes about just not the overall economy but housing in particular have improved. They are spending on durable items, not just everyday items, but they're spending on automobiles and furnishings. Spending on housing furniture is back up above where it was at the peak so that confidence is returning and conversely the fear of all those [bad] things happening in the housing sector are disappearing."

With a low inventory of existing homes on the market, builders should take a couple big steps down the road to recovery in 2014 but it continues to be a long haul.

"A typical ratio is 16 percent of all home sales in a year are new homes. Right now that's only 8 percent," Crowe said. "The new home component of all homes sales is half of what it normally is so we've got a long way back."

Still, the trend shows single-family starts are at the beginning of a recovery following an 8 percent decline from 471,000 in 2010 to 434,000 in 2011. The figure rose to 537,000 in 2012 with a 16 percent increase on top of that last year.

While the NAHB foresees a 32 percent gain to 882,000 starts, Frank Nothaft, chief economist at Freddie Mac, expects the increase to be closer to 20 percent if additional job growth and income growth makes buying a home more affordable.

An important part of the affordability equation is mortgage rates, which are averaging 4.375 percent for a 30-year fixed mortgage.

"It's up from a year ago, but a year ago mortgage rates were dirt cheap," Nothaft said. "We've gone from dirt cheap a year ago to cheap."

He said there could be one more a quarter point drop that drives demand in the short run for buyers who will see it as the last chance to get an exceptionally low rate.

Then, Nothaft expects some gradual upward pressure on mortgages will increase rates to 5 percent later this year or in early 2015.

Even so, home prices and lending will remain within reach of buyers whose incomes grow.

"That will help to support affordability and overall housing demand and that will translate to more sales," Nothaft said. "We expect sales to be up about 5 percent. It will generate more housing construction. We expect a 20 percent gain in new starts in 2014 and it will help support home values."

Rental rate robust

Multi-family housing starts will increase, too but at a slower rate than the 24 percent to 56 percent spikes seen in 2011-13, Crowe said. The NAHB forecast for this market shows back-to-back increases of 9 percent to 333,000 starts in 2014 and 363,000 in 2015.

"I expect the rental production to also be robust this year but not as fast with double-digit rates," Crowe said. "I think we're approaching a more steady equilibrium in that sector and therefore the speed of increase will decline slightly."

Multiple-family housing starts had been accelerated by a very strong demand for rental apartments from young people who did leave the nest but struggled to feather a permanent one of their own. Crowe said this group has gone almost completely to being renters because of their inability to get a mortgage coupled with high-debt burdens from college and simply starting out in life.