Housing Demand Grows; Will Supply Follow?

If there are two points economists during the NAREE conference agreed on, it was that housing demand is growing in the face of short supply and that the extent varies at a local level, from submarket to submarket around the country.

If there are two points economists during the NAREE conference agreed on, it was that housing demand is growing in the face of short supply and that the extent varies at a local level, from submarket to submarket around the country. The multifamily market is in better shape than single-family housing, but the pace at which it will advance from here remains a moving target, according to discussions during the mid-year economist forecast at the 46th annual real estate news conference produced by the National Association of Real Estate Editors in Denver on Friday.

According to David Crowe, chief economist for the National Association of Home Builders, growth in multifamily housing starts will grow but at an increasingly reduced pace as single-family starts to move. After a 56 percent growth rate, to 178,000 units, last year, he anticipates 27 percent growth, to 225,000 units, this year and more modest growth next year. Using 2000-2002 as an index point, he noted that the multi-family market is two-thirds of the way back to that level, while single-family is 38 percent there.

On the other hand, Stan Humphries, chief economist for Zillow, sees the rental market overall (both single-family and multi-family) as a “rapidly evolving story,” with rents up 4.6 percent year-over-year as demand remains strong but supply catches up with it over the next one to two years.

The single-family market remains constrained for a number of reasons. The three economists generally agreed that supply is a bigger problem than demand, but Crowe continues to see demand limited by issues ranging from economic to demographic. Among them, he listed a slowdown in new household formation, dropping from 1.3 million net additions per year between 2001 and 2006 to less than 589,000 between 2007 and 2012. That is in addition to the increased likelihood for new graduates to remain at home with their parents and the large number of household balance sheets under repair (in many cases leading to mortgages underwater).

On the supply side, Crowe pointed to new home production at the “lowest rate ever seen”—he estimated the current rate at one-third or less of “normal” production levels. Ownership dropped from 1.1 million to 222,000 additions per year, while renters grew from 202,000 to more than 810,000 per year, he said.

National Association of Realtors chief economist Lawrence Yun took a more optimistic stance, noting that home sales are up from their 2009 low, although their tendency to track along the bottom rather recover more rapidly remains counter to previous recessions. But demand is strong, he maintained, supply is moving in the right direction, and the foreclosure arena continues to improve, year by year.

Yun believes that either housing starts will recover strongly or prices will rise faster than people expect—perhaps 10 percent, which he noted Alan Greenspan some time ago determined would be very good for the economy. Crowe and Humphries took a less positive stance. Crowe pointed to a Catch-22, with housing prices still having to rebound more consistently before people feel confident that a new purchase won’t lose valuation, while Humphries noted that many would-be buyers are trapped in their homes until they can sell them. “The housing market has become like a thinly floated public stock,” he noted.

In addition, Humphries said, builders have burned through their supply of buildable land, and Crowe observed that building supplies have been cut back too much to allow builders to pick up their pace—and their ability to obtain financing has also been tightened.