Housing Recovery Should Accelerate into 2013, if Washington Behaves

Three economistsrntold attendees at the International Builders Show that the housing marketrnshould continue to improve on an accelerating basis in 2013.  But each cautioned that there are manyrnfactors, especially on the federal government level, that could still derailrnthe recovery.  The builders, meeting inrnLas Vegas on Tuesday, heard from David Crowe, Chief Economist, NationalrnAssociation of Home Builders (NAHB), David Berson, senior vice president andrnchief economist at Nationwide Insurance and Frank Nothaft, chief economist atrnFreddie Mac.  </p

Crowe said thatrnnearly every indicator of housing market strength, permits, prices, sales,rnhousing starts, and builder confidence, has been trending upwards in recentrnmonths.  He noted that home prices, whichrnare up nearly 6 percent on an annualized basis over the last 10 months, arernparticularly important because they are a trigger for people to return to thernmarket “People feel comfortable if they buy a house that will appreciate, notrndepreciate, in value,” he said.  </p

He pointed as wellrnto other positive indicators including low rates and strong affordability, risingrnhousehold formation and a general improvement in the economy. Housing is nowrnalso contributing to rather than acting as a drag on the economy and increasedrnits share of economic growth to 12.8 percent in the fourth quarter of 2012.<br /<br /Setting the 2000-2003 period as baseline benchmark for normal housing activity,rnCrowe ticked off other positive indicators:</p<ul class="unIndentedList"<liResidential remodeling has returned tornpreviously normal levels and activity is expected to increase 2.4 percent thisrnyear. </li<liThe hardest-hit market, single-family houses,rnwas running at 44 percent of normal production in the fourth quarter of 2012rnbut should rise to 52 percent of what is considered a typical market by thernfourth quarter of this year and 70 percent by the fourth quarter of 2014.</li<liSingle-family starts are anticipated to rise 22rnpercent from 535,000 last year to 650,000 in 2013 and to 844,000 units in 2014.</li<liOn the multifamily side, NAHB is anticipatingrnthat starts will increase 22 percent from 246,000 units last year to 299,000 inrn2013, and rise an additional 6 percent to 317,000 units in 2014.</li</ul

However, Crowerncautioned that builders continue to face several challenges, includingrnstubbornly tight mortgage lending conditions, inaccurate appraisals, risingrnmaterials prices and a declining inventory of buildable lots.  He also cited the potential that the continuingrngridlock in Washington over the debt ceiling, sequestration, and the budgetrnalong with calls by some policymakers for major changes to the mortgagerninterest deduction, could negatively impact consumer confidence and futurernhousing demand.  </p

Berson echoed thesernconcerns and said it is still too soon to completely rule out the chance that arnpolicy stalemate will lead to an economic downturn.  However, he said a more likely scenario isrnthat the Administration and congressional Republicans will likely reach somerntype of agreement that addresses the multiple pending fiscal deadlines.<br /<br /He told the builders he expects GDP growth of 2 to 2.5 percent this year, withrnslower first quarter growth in response to the unresolved federal government spendingrnissues before the economy picks up modestly as the year progresses.  However, if the full spending sequester isrntriggered it would cut more than $100 billion in defense and non-defense spendingrnwhich could reduce 2013 growth to 1 to 2 percent.<br /<br /If a relatively positive outcome occurs on the spending debates in Washington,rnBerson said this will pave the way for the housing and auto industries to leadrnthe economy in 2013. Low mortgage rates, steady job growth, stronger householdrnformations and widespread house price gains over the past year are all positivernfor home sales; yet tight mortgage credit is limiting opportunities for creditworthyrnborrowers.   “The problem is mortgagernlending standards are way too tight,” he said. rn”If we were at a scale of nine or 10 in 2005-2006, we are at a tworntoday. We want to be around a five.”  rnBerson also noted that several federal agencies will be releasing finalrnrules later this year on a national qualified residential mortgage standardrnthat could further restrict mortgage lending.<br /<br /Nothaft said that those buyers who are able to access credit will find homernloans at the lowest rates in 65 years. rnHe called the declining rates an important stimulant driving housingrndemand and projected that that 30-year, fixed-rate mortgages will stay below 4rnpercent through the end of 2013.<br /<br /The refinance boom for single-family homes associated with low mortgage ratesrnis expected to continue this year but gradually taper down. While overallrnmortgage originations are forecast to fall 15 percent in 2013, Nothaft saidrnthat home purchase originations will be trending higher and home sales will riserna projected 8 percent this year.<br /<br /Prices rose in 42 states between September 2011 and September 2012 Nothaft said,rnand prices increased nationwide by 4 percent. rnThey are projected to increase 2 to 3 percent in 2013 and with thernoversupply of vacant homes at their lowest level in a decade, this will furtherrnease downward price pressure.<br /<br /Rental vacancy declines have occurred in most markets since 2010 and U.S.rnapartment values are up about 8 percent over the past year. This has led to anrnincrease in rental rates, but rents still remain relatively low adjusted forrninflation according to Nothaft.<br /<br /Nothaft forecast 930,000 housing starts for 2013 and Berson said starts couldrnhit 980,000 this year. NAHB forecasts 949,000 total housing starts in 2013, uprn21.5 percent from 781,000 units last year.

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