New Home Forecast: A Climb to Higher Ground in 2017
New home production predicted to continue a gradual upward trajectory in the new year
Fueled by a growing economy, solid employment gains and rising household formations, single family new home production will continue a gradual, upward trajectory in 2017, according to economists speaking at the National Association of Home Builders (NAHB) International Builders’ Show in Orlando.
“While positive developments on the demand side will support solid growth in the single-family housing sector in 2017, builders in many markets continue to face supply-side constraints led by the three ‘Ls’ – lots, labor and lending,” said NAHB Chief Economist Robert Dietz.
He said that 64 percent of builders nationwide report low or very-low lot supplies; the rate of unfilled jobs in the construction sector is now higher; and acquisition, development and construction loans for builders – while on the rise – needs to grow faster to meet demand.
“The industry needs to recruit more workers and get more land in the pipeline, but it will take time,” Dietz said.
However, supply-side challenges are more than offset by continued economic growth, ongoing job creation, rising wages and favorable demographics. Moreover, builder confidence is higher because builders expect the incoming Trump administration to help to lower regulatory costs.
“Regulatory requirements make up nearly 25 percent of the cost of a new home,” said Dietz. “Given those constraints, it is hard to build a $200,000 entry-level house.”
In a sign that more millennials are getting off the sidelines and jumping into the market, Dietz noted that townhome construction, which can be a useful bridge for millennials to transition to homeownership, is showing impressive growth and now constitutes 12 percent of all single-family starts.
- NAHB expects mortgage interest rates to average 4.5 percent in 2017 and 5.3 percent in 2018.
- NAHB projects 1.16 million total housing starts in 2016, up 4.9 percent from the previous year’s total of 1.11 million units.
- Single-family production is expected to rise 10 percent in 2017 to 855,000 units and increase an additional 12 percent to 961,000 next year.
- Using the 2000-2003 period as a benchmark for normal housing activity when single-family production averaged 1.3 million units annually, single-family starts are expected to steadily rise from 56 percent of “a typical market” in third quarter 2016 to 75 percent of normal by fourth quarter 2018.
- On the multifamily front, NAHB expects multifamily starts to hold steady in 2017 at 384,000 units, which would be 1,000 units above last year’s pace. While this level is slightly above trend, Dietz said the pace is sustainable due to demographics and a balance between supply and demand.
- Residential remodeling activity is expected to register a 1 percent gain this year over 2016.
Affordability and demographics
CoreLogic Chief Economist Frank Nothaft expects mortgage rates to rise and home prices to moderate in the coming year.
“We anticipate that a stronger economy will translate into higher mortgage rates,” said Nothaft. “Meanwhile, we expect moderation in 2017 for rent and home price growth, but it will still be higher than inflation (thanks to) tight inventory in the housing market.”
He said home purchase originations should rise 5.7 percent in 2017, and credit risk for home loans is substantially lower than 10-15 years ago.
The biggest housing issue in 2017 will be affordability, Nothaft said.
“Mortgage rates are up three-quarters of a point since last summer and house prices are up. That starts to pinch a household budget.”
On the flip side, demographics will be very positive for housing and home sales going forward.
“As millennials age from 25-to-30, that is a big potential base to expand the home buyer market,” said Nothaft.
Supply and demand
David Berson, chief economist for Nationwide Mutual Insurance Co., also expects mortgage rates to rise in the coming year, but he said it shouldn’t have a negative impact on housing demand.
“Higher mortgage rates will be offset by stronger wage gains and job growth, which suggests that housing demand will increase this year,” said Berson. “The question is, how much will supply go up?”
He said most U.S. metro areas are relatively healthy, marked by solid job growth, mortgage delinquencies down to near-normal levels and strong, but not excessive house price gains.
A major concern going into 2017, he said, is that demand will exceed supply, which puts upward pressure on home prices.
“If there aren’t enough homes on the market, that will be a problem,” said Berson. “Price gains need to moderate. We can’t have six, seven or eight percent gains. That is not sustainable.”
That situation could downgrade many markets from “healthy” to “neutral.”
Source: “New home forecast: A climb to higher ground in 2017,” Florida Realtors