Wednesday, December 22, 2010

Housing Recovery Expected to Gain Strength in 2011 and 2012

An excerpt from about an improving outlook on housing as the job market improves.

The job market should improve sufficiently in 2011 to begin thawing the big freeze in household formations of the past few years and to put consumers in a brighter mood, both of which are prerequisites for boosting housing demand.

Some parts of the country will recover sooner than others, the economists on the panel said, and foreclosures will linger as a problem in many of the largest housing markets. However, supply and demand may be in a healthier balance than suggested by today’s high vacancy rates and even conservative demographic projections suggest that housing production will have a lot of catching up to do in the decade ahead.

Job Growth the Key

“The key to recovery is job growth,” said Crowe, “and that has been relatively slow.” Average monthly employment growth following recessions in the 1980s and 1990s was in the range of at least 200,000 new jobs. By comparison, the first six months of this year averaged 139,000, including many temporary Census jobs, which barely made a dent in the 8.5 million jobs lost in the recession. “We need to add about 100,000 to 125,000 jobs just to keep up with growth of the labor force,” he said.

When asked why buyers were remaining on the sidelines, almost 85% of the builders surveyed by NAHB said it was because they could not sell their existing home and 78% said it was due to uncertainties over employment and the economy.

In the period ahead, Crowe said he was looking for better job creation to spur household formations, which over the course of the recession were 0.5 million to 1.5 million lower than they should have been as people doubled up with friends and relatives. “We’ve got a lot of people right on the edge who will soon form households,” he said. “They are ready to move out and begin to absorb the housing stock that’s out there.”

A Multifamily Surprise

With signs looking favorable that new-home sales will be gradually improving, Crowe forecasted a 37% increase in single-family starts in 2011 to 655,000 units and a further 48% climb to 970,000 units in 2012. Starts this year are expected to rise to 470,000 units, a “marginally better” 8% gain from 2009 but lower than had been originally anticipated.

Multifamily construction, on the other hand, “made a surprisingly decent rebound midyear,” he said. “It had been expected not to do as well in 2010 as in 2009, but that is now reversed. The latest NAHB forecast shows multifamily housing starts bottoming out at 112,000 units in 2009 and then rising 12% this year to 125,000 units, 19% in 2011 to 149,000 units and 41% in 2012 to 210,000 units.

Better Private Payroll Growth

Maury Harris, chief U.S. economist for UBS, said that 2.7% real growth in 2010 and 2011, while substandard, will generate “some decent results” for business and the stock market. “In terms of jobs, they will pick up next year,” he said. “The longer we can sustain even moderate growth, the more employers have confidence in going ahead in hiring.” They will remain cautious until they see demand staying at least at its current level.

Harris predicted that private payrolls will grow by about 150,000 jobs a month next year, compared to around 95,000 now, leaving the unemployment rate at 9% at the end of 2011.

Once the Federal Reserve begins seeing better job growth, he said, “it will be talking about tightening, not easing.”

Banks Easing Lending Standards

Harris was confident that better employment gains will be achieved next year because banks — confronted by weak demand for loans and the need to compete for a bigger market share — began easing their lending standards this summer. That historically has been associated with improved private employment growth, he said, especially among firms with less than 50 employees, who have been contending with severe credit constraints.

Republican control of the U.S. House of Representatives will also be heartening to the small business community, easing its concerns over taxation and regulatory policies emanating from Washington and producing a pick-up late in the year in business confidence indexes, he said.

Household debt burdens relative to income “are tumbling,” he added, a good omen for stronger consumer spending. “Debt is holding back the consumer less and less.”

A Severe Market Correction

“Most economists now are predicting job growth next year that would be sufficient to begin to eat into the unemployment rate,” said Eric Belsky, managing director of Harvard University’s Joint Center for Housing Studies. “Jobs are very critical to a recovery in housing, because it goes straight to consumer confidence and business confidence. The longer housing remains stressed, the lower the confidence of most decision makers in the economy.”

Taking a broader and longer view of the housing cycle, Belsky said that the market has now corrected for the housing boom with a severe downturn in which both home prices and home building have dropped dramatically, and this has some positive implications for future growth.

The declines in house prices and mortgage rates have reduced average monthly home payments to a historic low. “This is a plus because when a more meaningful recovery does begin, more people will be able to get into the market,” he said. “An environment that is remarkably affordable is likely to hold for the better part of next year and beyond.”

And as a result of steep cuts in production during the downturn, a total estimated 15.8 million completions of single-family and multifamily homes and placements of manufactured homes from 2001 to 2010 puts the supply of new housing for this period back into balance with demand.

“The market doesn’t look like it’s oversupplied in the long term,” Belsky said, and the current inventory should be absorbed as demand returns. A similar trend is occurring in remodeling.

Two-thirds of the demand will be coming from household formations, which will be fueled by an aging population, by the extra-large echo-boom generation of children of baby boom parents and by immigrants, he said.

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