2020 is just around the corner – economic forecasts have been predicting everything regarding market trends, housing data, and the behavior of the generations that influence them. Different sources report vastly different conclusions, so who do you trust? For an economic forecast on new constructions, we got our trusted source at the National Association of Home Builders (NAHB). We sat down with Robert Dietz, Chief Economist for NAHB, and Danushka Nanayakkara-Skillington, Assistant Vice President of Forecasting and Analysis for the NAHB.
Buzz: Can we have some insight into new construction housing in 2020? What’s changing, how will it impact, and why is it happening?
The housing rebound that began in the spring continues, supported by low mortgage rates, solid job growth, and a reduction in new home inventory. Builder confidence (the NAHB/Wells Fargo HMI) reached a 20-month high in October this year at a level of 71. Sustained by reduced interest rates and improved inventory levels, the pace of single-family permits has been rising since April and single-family starts have been increasing since May.
We expect continued modest gains for single-family construction moving forward, as areas beyond the exurbs respond to for-sale housing demand and ongoing healthy labor markets. Meanwhile, as apartment development levels off in 2019, we expect relatively flat conditions for multifamily starts. Remodeling should pick up after slowness in 2019 due to weakness in existing home sales, the skilled labor shortage, and rising construction costs. However, as existing sales increase somewhat with lower mortgage rates, remodeling should respond favorably.
Buzz: One trend that we see on the rise will be millennials in the housing markets – can you discuss how they will have an impact in the near future versus 5-10 years? How have generations disrupted things in the past?
NAHB Home Building Geophagy Index (HBGI) data indicate that new home construction is concentrated in the top counties for Millennial population, representing 59% of single-family construction and 80% of multifamily development.
However, the growth rates for these areas have been lagging the rest of the nation in recent quarters, suggesting a possible spatial mismatch between housing demand and housing supply, which further exacerbates the ongoing housing affordability crisis particularly for younger households. As millennials age, their ability to afford housing in more expensive areas may improve as incomes expand, but until that occurs, drive-until-you-qualify may be a required strategy for many entry-level home buyers.
Therefore, many younger households will choose to rent longer. Consequently, the two highest millennial-dense geographies are core counties of larger and small metro areas where there is greater availability of rental housing. Conversely, inner suburbs of big cities have more interest rate-sensitive buyers because such borrowers need to use smaller down payments and higher loan-to-value ratios to make a single-family home purchase. The HBGI data show that 79 of the 199 counties that are suburban counties of large metro areas are also millennial-dense counties. As of the third quarter of 2019, they show the slowest year-over-year growth among the seven regional geographies due to the rise of rates at the end of 2018 and continuing into the 2019.
Over the long-run, however, NAHB is forecasting gains for homeownership among the Millennials, as they age in greater numbers in their 30s and have children. These lifecycle events will stimulate demand for single-family construction, already at low inventory levels. Thus, we see positive conditions for home building over the next decade. The composition of that new construction will likely change however, as smaller and more dense new housing is built. A good example of this kind of construction is townhouse development.
Buzz: What do you believe is the economic forecast for 2020?
The U.S. economy is currently in its longest expansion in history. Real GDP increased 1.9% in the third quarter of 2019, and we are forecasting GDP growth of 2.3% for 2019 when all the data are in and a 1.8% pace in 2020. We should see the economy continue to grow but at a slower rate. Job growth remains solid but on a slower trend, which will lead to a slight increase in the unemployment rate over the next two years. While the probability of a recession has increased over the last year, we see the chances of a slowdown lower than they were a year ago due to the more dovish monetary policy stance of the Federal Reserve.
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