Midyear Housing Outlook
Wednesday, August 2, 2017
By John McManus, Builder
Housing's recovery – supported by demographics, jobs and wage growth, moderately low interest rates, still affordable prices, and pent-up demand –has more of the same good-but-not-great news and numbers ahead for the next 18 to 24 months.
Then, look for some red flags, especially if the broader economy checks up, slowing job growth momentum.
Builder sibling Metrostudy chief economist Mark Boud's top line analysis of housing's outlook – the 2nd Quarter 2017 National Residential Economic Report – can be found here with a click.
Boud's take on housing's Goldilocks recovery directionally matches up with most of the business community's smart observers, a constructive view of steady, modest improvement, fueled by economic fundamentals on the demand side, and cadenced by lot, labor, and lending constraint on the supply side.
“We like to call it the CFO's Recovery,” one astute observer in the arena tells us. “It's not as sharp, fast, flashy, or dramatic as a CEO would want the recovery cycle to be, but it's manageable, predictable, and it allows prudent planning for the future.”
Boud's looking at some upward pressure on mortgage rates into the 2020 timeframe, with a peak at around 6.1% before retracing back a bit, and during most of that time, the picture looks quite a lot like it does and like it has, with single- and multi-family housing starts stepping up from 1.26 million this year, to 1.355 in 2018, to 1.44 in 2019, before a slight drift back in 2020.
New home sales for 2018, Boud says, will reach 710,000, but the forces in play dragging on new home sales' share of the total aren't likely to shift in any material way.
Here are some of the other highlights of Boud's 10-minute debrief on all the key metrics you would want to know:
- The unemployment rate continues to fall and is currently at 4.4%.
- Housing starts will continue to climb until 2019, when we expect it to plateau.
- Housing shortages will become more intense, causing an accelerated and sharper real estate cycle with a peak in 2018/19.
- An extended period of low mortgage rates has allowed home prices (and land value) to rise higher and more rapidly than they should have.
- A higher national Debt-to-GDP ratio will lead to higher interest payments, which will eventually dilute U.S. currency and slow the U.S. Economy.
The real “secret sauce” of Boud's intelligence comes when he speaks to his proprietary model of over- and under supply of housing in the nation, as well as over- and under valuation.
It's these benchmarks that can and do flag counter-intuitive dynamics in the timeframe ahead, and allow for preparation.
As many builders and housing industry experts right now are predicting a continued “long tail” recovery despite the fact that this one is historically long, as are expecting a macroeconomics-driven pull-back in about the 36- to 48-month horizon.
Some suggest that because the recovery has been so gradual and tepid that any downturn in the horizon would have to be similarly moderate.
Of course, humans are highly prone to error when it comes to the future.
“If you asked builders to make their projections for what's going to happen and then ask them to say that if they're wrong, in which direction they're wrong, almost all of them will tell you they're probably not pessimistic enough about the risk that's out ahead of them,” says one of our executive observers.
So, preparing for risk to amp up – especially when an under-built housing environment shifts to an over-built one, and when an under-valued market suddenly flips to over-valued – is in vogue among some, even as others bank on strong conditions to support solid growth through 2018.