Economists Offer the Good, Bad and Ugly in Construction Forecast

October 28th, 2011 by DWM Magazine

Are housing markets improving? What about construction credit? Are housing prices getting back in line with incomes? These were some questions economists tackled during the National Association of Home Builders (NAHB) recent Fall Construction Forecast Webinar. The program was led by David Crowe, PhD, chief economist and senior vice president for NAHB, Joel Prakken, senior managing director and co-founder, Macroeconomic Advisors, and Robert Denk, assistant vice president for forecasting and analysis with NAHB.

Crowe opened by saying while there would be variations in all three presentations, “in general we all have basically the same view of what will happen; this gives you the chance to decide what best applies to your local market.”

Speaking of the housing market, Crowe began his presentation stating, “We are at the mercy of what happens in the overall economy.” Pointing out that 2011 has seen “a couple of lousy quarters in economic growth,” he expects it will get better and better in 2012 and into 2013.

But slow growth means deterioration in the employment market.

“During all of 2010 we only had 78,000 additions,” said Crowe.

He also pointed out that housing has not been doing its share either as its waiting for the rest of the economy to pick up.

“Residential fixed investment (RFI) is about half of what it usually is,” said Crowe, who explained that one important reason the economy is not doing better is that the consumer does not have a lot of confidence. In addition, foreclosures are a heavy burden on the housing market, but the good news is they have been declining. He said there are almost 2 million mortgages in foreclosure.

 

“Right now the number of foreclosed homes is relatively steady,” said Crowe, explaining they are still heavily concentrated–about 70 percent is in only a dozen states including Florida, California, Nevada and Arizona.

He also said house prices are starting to return to normal levels and we’re seeing resettling of house prices more in line with what people can afford.

“Mortgage rates are very low and will stay relatively low,” Crowe added.

Looking at single family starts, these are still at low levels, but Crowe expects to see some recovery in 2012. Multi-family, though, has done well with an almost 50-percent increase this year. And residential remodeling is doing a little better than other sectors. “It’s fallen, but not that much,” said Crowe, who explained it was helped by tax credits for energy efficiency and home buyers deciding to stay and improve rather than move.

“Homes that have been bought by investors needed to be improved before they could be put back on the market,” he said.

Prakken, who spoke next, titled his presentation, “No Recession, Just More Muddling Through,” and gave a view of where the macro economy is going.

Speaking of GDP, Prakken is expecting it to grow about 1.5 percent this year and 2.5 percent next year.

“That’s slightly above the consensus forecast so color me optimistic,” he said.

Still, it’s a slow market and, as Crowe had noted, Prakken pointed our that “slow growth implies a weak labor market; we see essentially no decline in unemployment by the end of next year and only a modest decline in 2013.”

Prakken added, “A weak labor market means a lot of slack in the construction economy so I think inflation will stay well contained.”

Likewise, he expects interest rates to stay at 0 all the way to 2013 “and maybe even later than that.” He said the financial terms builders face and the mortgage rates buyers face will be low and that’s good news for housing sector.

Speaking of housing prices, he said they are “falling and household is wealth declining.”

“Housing prices are critical for construction activity,” said Prakken, noting that no one wants to build or buy a house if prices are expected to fall after it’s bought or built.

As far as prices, he expects little change next year and not until 2013 will house prices rise about 2 percent.

Denk next took a look at some regional differences in the housing recover. He said while nationally single family starts are down not all states behaved as with national numbers.

“Some states are better off and some lower,” he said. The hardest hit states have been “the bubble states,” California, Florida, Nevada and Arizona. He said they are in the roughest shape because of overbuilding and price spikes.

“Michigan and the industrial Midwest are also suffering based on economic difficulties,” said Denk.

Looking at housing prices, Denk said where you are in the country makes a big difference and that house prices are starting to come back to normal. In some areas, like the bubble states, he explained, those peaked with house price ratios double or near double historic ratios, while other states were much lower.

Will the economy be in line with these expectations next year? The NAHB will take a look when it hosts its next Construction Forecast Webinar in the spring of 2012.

Stay tuned to dwmmag.com for more news and forecasts as they are made available.

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