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January 09, 2018 01:00 AM

New housing starts, remodels expect to increase

Catherine Kavanaugh
Senior Reporter
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    Jeff Davis Photography
    The "New American Remodel" house is part of the construction industry's annual building show in Orlando, Fla. Economists predict homeowners will invest more in their existing houses.

    Orlando, Fla. — Single-family housing starts are expected to increase 5 percent this year to 893,000 units, which puts the market recovery to 63 percent of the "normal" levels of 1.3 million new homes built annually from 2000-03.

    The job market is solid, wages have grown, foreclosures are at their lowest level in a decade and loan delinquencies are down almost everywhere except for Houston, where they doubled after Hurricane Harvey.

    The macro outlook for 2019 is promising, too, according to three economists who offered glimpses Jan. 9 into the housing market at the International Builders' Show. The single-family housing market is expected to grow again by 5 percent next year to 940,000 units, which would be 73 percent of what was normal some 15-18 years ago.

    The biggest markets for new home sales remains in the West and South, places like the Texas cities of Houston, Dallas, San Antonio and Austin as well as Phoenix, Atlanta and Charlotte, N.C., where local economies are doing well.

    The slow return of first-time buyers to the housing market also shows signs of picking up. The peak group of millennials is 26 years old while the peak age of buyers is 32-33.

    "Each year they will age into the peak years of first-time home ownership. New construction will be needed to meet that demand over time," said Frank Nothaft, chief economist for CoreLogic.

    Still, the economists have concerns about interest and mortgage rates, "the wild card" of tax reform, student debt, and an increase in auto loans.

    Economist David Berson of Nationwide Insurance said he wouldn't be surprised to see the 30-year fixed rate for home loans end the year up close to 4.5 percent. Job and wage growth should more than offset any negative effect on the housing market, he added, but others aren't so sure.

    Robert Dietz, chief economist for the National Association of Home Builders, said saving for a down payment could become the primary challenge for buyers.

    Nothhaft put it this way: "It's not just a gradual erosion of affordability, which already is challenging in some markets but also the effect on homeowner mobility. It's known as the lock-in effect and it might dissuade you from putting your home on the market and moving. That has implication on the for-sale inventory of existing homes, which has been low."

    ​

    Jeff Davis Photography

    Homeowner who already have low interest rates for their mortgage may opt to pour more money into their existing properties, economists said.

    Multiple-unit housing

    Economists also expect the market for new multi-family housing to contract for a third year in a row in 2018, this time by 2 percent to 354,000 units. Dietz said he sees vacancy rates rising and the market leveling off.

    The economists made a similar projection for 2017, however, and Dietz acknowledged, "we underestimated the decline. It's likely to end the year [2017] down 8 percent."

    Combined with single-family construction, some 1.25 million new housing units will be built in 2018.

    In 2019, the multi-family segment is expected to decline again by 3 percent to 344,000 new units . Factor in projected single-family builds and the nation should add 1.28 million residences to the housing mix next year.

    ​

    For remodelers

    Good market conditions continue for home remodelers, who can expect a 7 percent increase in 2018 followed by another 3 percent next year. The market currently is valued at about $200 billion.

    Homeowners locked into low mortgage rates are choosing to stay in their houses longer and update kitchens and bathrooms.

    "In 2018, given the lack of mobility rates and people sitting on wealth, we see another strong year for remodeling spending," Nothaft said.

    Overall, 2019 might be the peak of the housing market for this cycle, Dietz said, noting that the building industry is heading into its 10th year of expansion.

    "We may eventually get to starts of 1.5 million but I don't think it's this cycle," he said.

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