October 22, 2003

By David F. Seiders
NAHB Chief Economist

 
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Analysts at NAHB’s Construction Forecast Conference paint a bright picture …
Today I hosted NAHB’s semiannual Construction Forecast Conference at the National Housing Center in Washington, DC. This column portrays the consensus reached on the major agenda items.

Three NAHB economists (including yours truly) and seven top-flight analysts from the consulting industry, Wall Street and the housing GSEs (Fannie Mae and Freddie Mac) reached solid consensus on several fronts: the short-term economic and housing outlook, including regional patterns; the long-term outlook for housing production, home prices and mortgage finance; and recent patterns of consolidation in the home building industry as well as likely trends for the future.

The near-term outlook is quite good for the U.S. economy and the housing sector…
It’s perfectly clear that economic growth has been accelerating sharply since June, and forecasts of GDP growth for the second half of 2003 and for 2004 are quite strong. While productivity growth will remain robust, the strength of spending and output will generate systematic job growth and lower the unemployment rate before long. The strength of aggregate demand is being supported by highly stimulative monetary and fiscal policies.

The housing sector will do quite well through 2004 in the economic and financial market climate portrayed in the consensus outlook. There will be some fade in home sales and housing starts as interest rates gravitate upward in 2004, but sales for the year are likely to be the second highest on record and total housing starts are likely to be around 1.7 million units — off only 5% from 2003’s surging pace. Conventionally built single-family units will continue to account for about 80% of all new housing units produced, while the multifamily market will soften and shipments of manufactured homes will stage only a minor recovery from the historic lows in 2003. [return to top]

Job growth and migration are critical to the health of regional, state and metro housing markets …
As interest rates move up from their cyclical lows, housing markets will be increasingly dependent on job growth and net migration to fuel the demand for housing units and to support home prices. Net foreign immigration is highly important to various “gateway” metro areas and states, while net domestic migration is a powerful force behind the geographic distribution of national housing activity. Turnover can cause a housing market to be “active,” even if the net change in the number of households is small.

Most states (43) are likely to experience some decline in single-family starts in 2004, with relatively large declines concentrated in the Midwest and Northeast regions. Forty states should experience setbacks in multifamily starts, largely in the northwest and mountain states. Housing intensity (total starts per 1,000 population) should range between two and 19, with the highest intensity in the southeast and mountain states and the lowest intensity concentrated in the Northeast region. [return to top]

The long-term housing outlook is very good or great, depending on the path of foreign immigration …
Forecasts of the demand for new housing units over the next 10 years are based on estimates of household formations, housing replacement needs and housing vacancies (including second homes). While all these factors are subject to uncertainties, the greatest uncertainty surrounds the path of net foreign immigration. This factor was seriously underestimated by the Census Bureau in the 1990s, and net immigration apparently is running above Census expectations for the early years of this decade.

The Census Bureau’s “middle series” population projection supports a forecast of 1.82 million housing units (on average) for the next 10 years, while the “high series” (incorporating a larger immigration number) supports a forecast of 2.1 million per year. Something on the order of 1.9 million seems quite reasonable, and that performance would outpace both the 1980s and 1990s. [return to top]

House price and mortgage financing trends also are quite positive …
The projected strength of demand for single-family homes, along with constraints on new supply stemming from the proliferation of land-use regulations around the country, should keep house prices rising at a 5%-6% annual rate over the next 10 years, delivering average “real” (inflation adjusted) gains of 3%-4%.

The forecasts for single-family home sales and housing production, along with the forecasts for home price appreciation and borrowing against housing equity, support a forecast of $22 trillion in mortgage originations during the next 10 years, compared with $13 trillion during the past 10 years. In the process, residential mortgage debt outstanding will more than double to $17 trillion. This volume accentuates the need for a broad range of mortgage investors as well as a strong secondary mortgage market. [return to top]

Consolidation of home building industry raises questions about the future of small builders…
The market share of the top 10 home builders has more than doubled since the late 1980s and now exceeds 20%. The upward trend of mergers and acquisitions has accelerated recently and is likely to continue for some time. The top 10 builders are likely to account for 35%-40% of the for-sale single family market within 10 years. Merger of two of the top five companies could produce a mega-builder producing upwards of 100,000 units per year.

The various market advantages of large builders — including large land holdings and cost advantages in the markets for financing and building materials — may make the future of the small home builder dependent upon success in niches such as custom homes and small in-fill developments. [return to top]

Want more economic information? Find it in our publications.
Find more in-depth information in our three economics publications, Home Builders Forecast, Housing Market Statistics and Housing Economics. All are availaible by subscription. 

  • Home Builders Forecast includes analysis of single-family and multifamily residential activities, residential remodeling and the full range of nonresidential construction as well as the macroeconomic factors such as GDP, employment and interest rates that drive construction. If your business depends on reliable estimates of housing starts, construction spending and remodeling activity, Home Builders Forecast is designed to meet your needs.
  • Housing Market Statistics contains an overview of important developments and trends that serves as an executive summary of the current industry situation. It also contains annotated charts depicting movements in key indicators and tables providing monthly, quarterly and annual data for more than 250 variables.
  • Housing Economics provides a rigorous monthly overview of the economy, along with monthly data for more than 100 local markets and in-depth analyses of the niches and nuances of home building markets. Available online or in print, it is written in terms that builders, manufacturers and housing finance professionals can understand and apply to their own businesses.

To learn more or to order any of these three NAHB economic publications, visit the Economics Publications Information section of the NAHB Web site or call 800-223-2665.

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For more information or to contact us directly, please visit www.NAHB.org l ©2003, National Association of Home Builders