One of the most important influences on the US economy’s performance in 2013 and beyond is the expected shift in the housing sector from a drag on economic activity to a source of stimulus. Over the past several months there has been a growing body of evidence that housing is reviving. The three major measures of activity in the housing sector (new home sales, existing home sales and housing starts) all showed healthy improvement in 2012 and have maintained momentum in January. New home sales in January reached the highest level since mid-2008, while sales of existing homes topped 4.9 million (annually rated) for the first time since 2009. As sales have increased it has stimulated new construction. In January 2013 single family housing starts were up 20% from a year ago and at the highest level since 2008.
Although up from the bottom, none of these indicators is particularly strong. The level of activity in the housing sector has been so low for so long that a modest increase brings sales or starts back to the levels of 2008 or so. But new home sales are still less than half what they were in early 2007 and less than one third of the levels seen in 2005.
There are, however, some important signs that the housing sector is on the mend and will become a positive contributor to the economic recovery in the coming year.
• Household formations will drive demand. Household formations are the most important driver of the housing industry. Simply put, the more households there are, the greater the demand for housing. During the recession, the rate of household formation fell to less than half what it was before the recession. This has resulted from many individuals and families moving back with parents (or not leaving) due to economic stress, among other reasons. This low pace of household formation has been sustained now for the past five years even as the population in the age groups that form households has continued to increase. Eventually they will start moving out of current arrangements and the number of households in the US will increase more rapidly. As this occurs, demand for all types of housing (single family as well as apartments) will rise.
• Affordability has rarely been greater. The combination of low mortgage rates and the home price declines of the past several years have made housing more affordable than we have seen in our lifetime. The National Association of Realtors index of housing affordability, which combines prices, interest rates and household incomes to determine whether households can afford to purchase a home rose to an all-time high in early 2012 and has remained elevated over the past year.
• Mortgage lending is increasing. As with most of the housing indicators the growth is modest, but since bottoming in late 2011, mortgage lending has increased by about 2%.
• Delinquencies are declining. Part of the reason mortgage lending is not rising faster is that banks are still coping with a large number of problem mortgages from the housing bust. In the first quarter of 2010 10.1% of all mortgage loans were past due, a record high and more than double the historical average of 4.7%. Today that number has fallen to 7.1%, still high, but declining steadily. Lower delinquency rates will enable banks to increase mortgage lending going forward.
• Prices are rising. The S&P/Case-Shiller national home price index reached a bottom only a year ago. Pricing has remained under pressure despite signs of recovery because of the large number of foreclosures, the pace of which was slowed by the robo-signing issue. Because distressed sales of foreclosed homes are generally brought to the market at low prices, high numbers of foreclosures have held down prices. Now the worst of the foreclosures are behind us. This has caused prices to bottom and begin to rise. Higher prices will increase confidence, make it easier for existing owners whose homes may be worth less than the mortgage to sell and may help trigger demand as buyers who have been waiting for prices to fall further to enter the market.
The housing sector is one of the most important in the economy. When housing activity is increasing, employment is rising in construction as new home building grows. When a household purchases a home, they usually buy many of the goods that go into that house: appliances, furniture, carpeting, etc. In addition, the tie in to utilities, use financial services, buy insurance and engage in many other purchases of goods and services.
So housing has a multiplier effect on the economy that extends far beyond the actual construction and sale of the house.
Historically, housing has been one of the leading sectors in a recovery, but in the current recovery it is a laggard. Since the recession was a result of the collapse of the housing sector that is no surprise. But the housing sector is finally ready to start contributing in a positive way to the recovery.
As with most aspects of the current economy, the full impact of housing’s revival will likely be felt later this year as the path to resolution of the US and European debt challenges becomes more clear. But by 2014 we expect housing will be a strong positive force for US economic recovery.
For the commercial real estate industry, stronger housing means more consumer spending. That will support the retail and industrial sectors. In addition, a higher level of household formations will lead to a continuation of the growth in demand for multi-family housing. Although there is a cautious note here as well. As single family homes start selling at faster rates some of the current multi-family population is likely to migrate to single family homes that is likely to offset part of the impact of the increase in household formations.
When housing is strong the US economy is strong. That will lead to stronger employment growth and greater demand for every kind of commercial space.