Las Vegas — In June, the U.S. economy should set a record for the longest economic expansion in history. Housing economists think the streak will continue, but they see rising risks for a mild recession in 2021.
It won't be another Great Recession, but there could be a soft patch, hiccup or slowdown in late 2020 or 2021.
That was the consensus of economists who participated in a panel session on the outlook for home construction at the International Builders' Show, held Feb. 19-21 in Las Vegas.
Despite the solid job market and consumer spending, some trends could still weigh heavy on the housing market, speakers said. These include higher interest rates and tariffs, which may drive up costs.
That's a change from last year, when the so-called Three Ls — lack of labor, lumber issues and laws affecting regulatory burdens — were the main challenges for home builders
“That ended in 2018. As interest rates rose you had a noticeable pullback in both new and existing home sales,” said Robert Dietz, chief economist for the National Association of Home Builders.
Interest rate hikes increase housing prices, creating affordability issues. A year of home appreciation outpacing wage gains also is making it different for buyers and builders.
NAHB expects interest rates to gradually rise, with 30-year fixed rate mortgages averaging 4.81 percent this year and 5.08 percent in 2020.
Looking at how the overall economy affects housing, NAHB forecasts single-family housing starts will increase 2 percent to 894,000 units while multi-family housing starts will drop 2 percent to 379,000 units.
Overall, NAHB forecasts housing production will increase 0.8 percent in 2019 to 1.27 million total units compared to last year's projection of 1.26 million. (NAHB doesn't have solid numbers for 2018 housing starts because some data has been held up by the last government shutdown. The trade group estimates 2018 single-family starts at 876,000 units and multi-family starts at 386,000 units.)
The bright spots for builders remain the South and West regions, where more than 1,000 new-homes sales per month were posted in Houston, Dallas, Atlanta, Phoenix and Austin, Texas, from November 2017 to October 2018.
The hottest metro areas for the 12-month period ending October 2018 were Lafayette, La.; Ocala, Fla.; Wilmington, Del.; Coeur d'Alene, Idaho; and Lakeland, Fla.
The South and West will continue to lead new-home growth in the year ahead, according to Frank Nothaft, chief economist at CoreLogic. He sees new housing starts increasing 3 percent in 2019.
“Metros with good affordability, good job growth and good weather have had the highest growth in new home sales over the last year,” Nothaft said.
He expects the repair-and-remodel market to increase 5 percent compared to 2018.
“I see longer-term homeowners who've been in their homes 20, 25, 30 years will start making updates to their kitchen, bathroom and other parts of the house,” Nothaft said.
NAHB expects to see gains in modular or panelized housing in which some or all components are built in a factory. These kinds of houses currently make up about 4 percent of the market, but should increase as the labor shortage drags on.
The housing industry is short some 300,000 construction workers as contractors retire with fewer younger replacements lining up behind them. Recruitment efforts are underway, but in the meantime, products that save time at the work site are increasing in popularity.
Back to recession concerns, David Berson, senior vice president and chief economist at Nationwide Mutual Insurance Co., said the near-term risk is low, but he has his eye on the spread between the 10-year and 1-year Treasury notes. The spread has significantly narrowed and flattened in the past year, but isn't showing an inverted yield curve. An inverted curve indicates the yields on bonds with short durations are higher than those with a longer duration.
“All recessions but two were preceded by inversion on the yield curve. That's the recession signal,” Berson said. “Typically recession follows in 12-18 months.”
The odds are low, about 10 percent to 15 percent, that a recession will happen in the next year, he added.
“But because of these concerns, as you go out further in time the odds increase,” he said.