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April 2014

Builders Face Hurdles

But Predict Growth in Housing Starts

By NWREporter

April 2014

Single-family production is expected to fuel a slow and steady recovery of the housing market during 2014, according to forecasts from the National Association of Home Builders.

NAHB Chief Economist David Crowe described his single-family projections as "pretty aggressive" while cautioning that builders face "several headwinds."

NAHB is forecasting 1.15 million total housing starts in 2014, up 24.5 percent from last year's total of 928,000 units. Crow cited five factors for the turnaround: "Consumers are back, pent-up demand is emerging, there is a growing need for new construction, distressed sales are diminishing and builders see it."

Single-family production is projected to rise 32 percent in 2014 to 822,000 units and surge an additional 41 percent to 1.16 million units next year. Home sales overall are projected to hit 584,000 during 2014, which would be an increase of 35.9 percent from last year's total of 430,000 sales.

New home sales are averaging just 8.7 percent of total home sales. The NAHB economist said that is barely half the historical average of 16.1 percent.

NAHB is anticipating 333,000 multifamily starts in 2014, up 9 percent from 306,000 last year.

Consumer confidence has returned to pre-recession levels. NAHB is also encouraged by a rising number of household formations. Year-over-year formations are now averaging 620,000, which compares to 500,000 during the housing downturn, but is well below the 1.4 million additional households being formed at the height of the housing boom.

Builders are still confronting several threats that could hinder the pace of the recovery, according to economists who spoke at the NAHB International Builders' Show in early February.

Potential challenges include rising building material prices, persistently tight mortgage credit conditions, difficulties in obtaining accurate appraisals and limited availability in labor and developed lots. Crowe also listed gridlock and uncertainty in Washington as potentially damaging to the economic turnaround.  

Based on NAHB projections, nationwide housing starts would reach 71 percent of normal by the fourth quarter of this year, and 93 percent of normal by the end of 2015. Viewed on a state level, Crowe said by the end of 2015, the top 20 percent of states will be back to normal production levels. The association expects the bottom ten states to still be below 84 percent.

Other speakers at the IBS show predicted an uptick in mortgage rates and a rise in household formations. 

Frank Nothaft, vice president and chief economist at Freddie Mac, expects some upward pressure on mortgage rates as the economy strengthens and the Federal Reserve scales its buy-back of mortgage-backed securities. The increase should not be enough to harm housing affordability, he told his audience.

"Regarding mortgage rates, we've gone from dirt cheap to cheap, and I think we will see a gradual rise of about a half a percentage point to 5 percent in 2014," said Nothaft. But even then, he said, "most markets will remain quite affordable."

Another speaker, David Berson, senior vice president and chief economist at Nationwide Insurance, discussed "a significant pent-up demand to form households and even to build homes."

"At least 3 million fewer households formed over the past five years than would normally have been expected," Berson reported. Many college graduates were forced to double-up or move in with their parents, he noted as one reason for the shrinkage.

Stronger job growth and a strengthening economy in 2014 should lead to a rise in household formations, which will be important to supplement housing demand, Berson stated, adding, "I think this will be a pretty good year for home construction. There will be a big increase in single-family construction, but not as much for multifamily."

Since the builders' show, NAHB has been able to tally some of the impact of the unusually severe weather conditions affecting much of the U.S.

"Significant weather conditions across most of the country led to a decline in buyer traffic last month," said NAHB Chairman Kevin Kelly, a home builder and developer from Wilmington, Del. "Builders also have additional concerns about meeting ongoing and future demand due to a shortage of lots and labor."

That combination contributed to a 10-point drop in confidence in the market for newly-built, single-family homes. The NAHB/Wells Fargo Housing Market Index (HMI) for January fell to 46.