Single-Family Sector Leads U.S. Housing Market to Higher Ground in 2016

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According to economists who participated in a recent National Association of Home Builders' (NAHB) Spring 2016 Construction Forecast webinar; steady job growth, affordable home prices, attractive mortgage interest rates and pent-up demand will help the housing market continue on a gradual upward trajectory in the year ahead.
 
However, supply side headwinds led by a shortage of construction lots and labor, along with tight access to acquisition, construction and development (AD&C) loans, continue to hamper a more robust recovery.

"Builders remain cautiously optimistic about market conditions," said NAHB Chief Economist Robert Dietz. "2016 should be the first year since the Great Recession in which the growth rate for single-family production exceeds that of multifamily. And we see single-family growth accelerating in 2017 as the supply side chain mends and we can expand production."

Steady job growth has bolstered consumer confidence and rekindled housing demand. Nationally, payroll employment has surpassed its pre-recession peak by a modest margin and only a small number of states lag behind pre-recession levels.

The Forecast

Looking at the forecast, single-family production is expected to post a 14 percent gain in 2016 to 812,000 units and rise an additional 19 percent to 964,000 units in 2017.

Using the 2000-2003 period as a healthy benchmark when single-family starts averaged 1.3 million units on an annual basis, NAHB is projecting that single-family production, which bottomed out at an average of 27 percent of normal production in early 2009, will rise to 64 percent of normal by the fourth quarter of this year and climb to 77 percent of normal by the end of 2017. Single-family production currently stands at 58 percent of normal activity.

"Consumer surveys suggest the ultimate goal of millennials is to purchase a single-family home in the suburbs," said Dietz. "We see growth for single-family looking ahead. The recovery continues and is dictated by demand side conditions and supply side headwinds."

On the multifamily side, production ran at 395,000 units last year, above the 331,000 rate that is considered a normal level of production. Multifamily starts are expected to decline 4 percent to 379,000 units this year and rise 6 percent to 402,000 units in 2017.

Residential remodeling activity is expected to increase 3.3 percent in 2016 over last year and rise an additional 1.3 percent in 2017.

The Best Year Since 2006

Len Kiefer, deputy chief economist at Freddie Mac, cited several factors that should make this year's home sales the best in a decade:

• Household formations are projected to accelerate. Between 2008 and 2014, the slowdown resulted in 5.1 million fewer household formations than normal.

• Purchase applications show solid home sales that match demographics.

• More owners are current on their mortgages, with fewer defaults and less foreclosures.

• Solid job gains include rising salaries and wages.

• House prices are rising about 6 percent annually and appear roughly in line with incomes and rents.

"Demographic tailwinds are helping to propel the housing market forward," said Kiefer.
Freddie Mac is projecting 5.9 million total home sales this year, the highest level since 2006, and 6.2 million in 2017.

Regionally, Kiefer said that house price growth is the strongest in the South and West, with Nevada, Oregon, Washington, Colorado and Florida all posting double-digit statewide house price appreciation between December 2014 and December 2015.

Back to Basics

Also looking below the national numbers, NAHB senior economist Robert Denk said that housing market conditions are improving across the nation, but the pace of the recovery continues to vary by state and region.

"A common theme has emerged," said Denk. "The progress of market recovery is no longer a function of the boom and bust cycle marked by price bubbles, excess supply and foreclosures. The key driver of the housing recovery is now back to the underlying housing market fundamentals of population and job growth."

The hardest hit areas during the downturn included the "bubble" states of California, Arizona, Nevada and Florida, where housing market excesses were the greatest, and the industrial Midwest, where the longer-term decline in U.S. manufacturing was exacerbated by the recession. Marked by solid job growth, housing markets in the bubble states are on the mend while the Midwest continues to languish due to an ongoing sluggish manufacturing base.

The states with the strongest housing market recoveries are also among the leaders in payroll employment gains since the end of the recession. The strongest housing recoveries to date are in Montana, North Dakota and Utah, all with robust energy sectors, which helped push them near or beyond full recovery in housing production. The next tier of leaders includes Texas, Oklahoma, Louisiana and Alaska - again, all with prominent energy sectors.

While the collapse in oil prices since mid-2014 will undermine the strength of the economies in these states as their energy sectors contract, the extent of the weakening will depend on the diversity of the economy. "The basic principle remains the same," said Denk. "A strong economy, whether helped, hindered or unaffected by the energy economy, will be a key factor driving housing recoveries going forward."

In another way of looking at the long road back to normal, by the end of 2017, the top 20 percent of states will reach at least 102 percent of normal single-family production levels, compared to the bottom 20 percent, which will still be below 65 percent.