*Eye on the Economy is an NAHB newsletter that is published every two weeks and takes a larger view of recent economic and housing policy news.
All segments of the home building industry should continue to grow in 2013, according to the NAHB Economics housing and economic forecast. Single-family and multifamily construction will see strong growth rates, with remodeling experiencing lesser but still positive growth. Driven by demographic factors, the 55+ sector should witness growth comparable to that of single-family and multifamily building.
Growth in the housing industry remains critical for the economy as a whole, as the preliminary fourth-quarter GDP report from the Bureau of Economic Analysis demonstrates. Due to declines in government spending and business inventories, the initial estimate for economic growth for the last three months of 2012 turned down at -0.1%. However, home building (residential fixed investment or RFI) was a net contributor on the growth side of the equation for the seventh consecutive quarter.
For the final quarter of 2012, RFI added 0.36 percentage points to GDP, the second highest tally since the end of the Great Recession. Put another way, had home building been flat for the quarter, the initial estimate for fourth-quarter GDP would have been strongly negative at 0.46%.
And NAHB expects this growth for home building to continue. For the single-family market, there were 535,500 total starts for 2012, a 24% increase over 2011. The current rate of single-family construction is now up 74% from the market low point of March 2009 but represents only 44% of “normal” conditions (levels of activity comparable to the period of 2000 through 2003). For 2013, we forecast that single-family starts will total 650,000, a growth rate of 22%. And we expect that growth to accelerate into 2014, when single-family construction will grow another 30%.
Multifamily construction will continue expanding into 2013. The rebound of the multifamily sector has come more easily than other parts of the housing industry due in part to the strong demand for rental properties. After 56% growth off market lows in 2010, multifamily starts totaled 244,500 in 2012, a growth rate of 37%. NAHB expects this trend to continue, with slowing but still positive growth in future years. For 2013, we forecast a multifamily starts total of 299,000, a 22% increase over the prior year. And in 2014, we expect a smaller 6% growth rate to reach a starts total of 317,000.
Remodeling should also benefit from generally improving housing conditions. Total remodeling activity was up 4.5% from 2011 to 2012, despite the temporary sunset of a commonly claimed energy-efficiency tax credit for existing homes (that credit was extended in the fiscal cliff deal retroactively). For 2013, NAHB forecasts additional 2.4% growth, with 1.7% for 2014.
Focusing on the growing 55+ housing market reveals trends similar to that of the overall home building industry. NAHB estimates that total starts allocable to 55+ communities will increase 21.9% to 74,000 in 2013 19.9% to 89,000 in 2014. Demographics are driving this growth: The share of U.S. households aged 55 and over will increase from 42% in 2012 to 46.6% in 2020. Single-family 55+ starts will be up 23% in 2013 to a total of 37,500, while construction of multifamily 55+ housing units will increase 20.8% to a starts total of about 37,000.
The across-the-board growth forecast for the housing sector should result in job gains in 2013. NAHB estimates find that on average every single-family home built creates enough work to create three jobs. Correspondingly, every multifamily unit constructed and every $100,000 in remodeling expenditures each generate one job.
The positive forecast for 2013 and 2014 builds on the gains for housing in 2012. However, there was some slowing of elements of housing at the end of the year. The Pending Home Sales Index, produced by the National Association of Realtors, fell in December but remains strongly higher year over year. Similarly, existing home sales declined a little for the last month of 2012, but the current sales pace is up 13% compared to December 2011. Inventories of existing homes continued their decline.
According to the Census Bureau, the seasonally adjusted homeownership rate remained unchanged at 65.3% during the final three months of 2012. For the year as a whole, the homeownership rate averaged approximately 65.5% – the weakest calendar year average since 1996. Homeownership rates declined across all age groups compared to the fourth quarter of 2011; however, the largest year-over-year decline occurred among households headed by a person between 35 and 44 years old.
The declining homeownership rate for these younger households certainly helped to boost multifamily production for the year. For December, the annual rate of starts in buildings with five or more apartments increased 23 percent. The five-plus current starts rate is now up 115 percent year-over-year.
But the overall improving conditions for housing are reflected in the current Federal Reserve Beige Book. According to the report, real estate activity continues to grow, with all Fed districts except one reporting that residential construction expanding. The exception – the Kansas City District – noted that “increased lumber and drywall costs limited construction.”
Lending activity continues to improve, albeit at a moderate pace. The Beige Book indicated that tightness in mortgage lending may be showing signs of recovering in certain regions of the country. Overall, loan demand was higher or held steady in nine of the ten districts. Credit standards remained “largely unchanged,” though two districts, Atlanta and Chicago, reported that standards may have “loosened some.” In the Atlanta District, aggressive competition for highly qualified borrowers was leading a growing willingness on the part of banks to increase their risk tolerance and loosen credit standards.