NAHB Predicts Solid Year for Builders with Rise in Townhome Construction

2019 real estate market looks strong

While builder confidence for the coming spring and summer selling season is strong, their trade association isn’t looking for a year as dazzling as 2016 or 2017.

Based on current sales conditions and the recent fallback in mortgage rates, builder optimism rose in February, according to the latest poll by the National Association of Home Builders. But the NAHB is expecting only a “solid” year for the industry in 2019.

Single-family housing starts leaped 10 percent in 2016 and 9 percent more in 2017. But they rose only an estimated 3 percent last year. And the group’s chief economist, Robert Dietz, is forecasting a mere 2 percent rise, from 876,000 starts in 2018 to 894,000 this year.

That’s still far short of the roughly 1.2 million new units that are necessary to keep up with the projected increase in household formations, Dietz said at the NAHB’s annual convention and expo in Las Vegas in February.

Townhomes Continue to Rise

One bright spot in the association’s forecast is townhouse construction, which has been on a roll in recent years and is going to keep getting stronger, Dietz said. Townhouses, aka towns or townhomes, are the perfect bridge for renters who aspire to home ownership but can’t afford the heady cost of a more traditional single-family house.

For the last four quarters, townhouse production is up 24 percent over the previous four quarters as builders rush to capture their share of the first-time buyer market. That’s eight times as fast as the overall market, Dietz pointed out during a press conference at the convention, and their largest share since the housing downturn in 2008.

“Townhouse construction is set for further expansion given the demographics of renters entering the for-sale market, as well as ongoing land constraints and the growth of demand for walkable neighborhoods,” he said.

Not Much Change in Mortgage Rates

On another positive note, the NAHB is predicting that mortgage rates will remain relatively low. Most recently, loan costs have fallen on the news that the Federal Reserve will be patient as it watches over economic growth. However, the Fed has given no indication when it might start to ratchet up short-term rates again.

Dietz is anticipating that mortgage rates will average 4.8 percent this year and “rise gradually” to about 5.1 percent by the end of 2020. Another housing economist at the press briefing with Dietz was even more optimistic.

Frank Nothaft, chief economist at CoreLogic, a property analytics firm, said rates will remain below 4.7 percent this year. At the same time, though, a third economist, David Berson of Nationwide Insurance, was on the high side, saying rates will hover at a little over 5 percent this year.

No Recession Anytime Soon

In another piece of good news for the housing market, the three economists agreed that a recession is a long way off, perhaps not even until 2021 or 2022. That means that in June, the overall recovery from the Great Recession of 2008 will hit the 10-year mark, making it the longest on record.

“Eventually, the recovery will end. It can’t go on forever,” said Berson, who used to hang his shingle at Fannie Mae, the big secondary market company that keeps the money flowing for mortgages by purchasing loans from primary lenders and packaging them into securities for sale to investors worldwide. “The odds of a downturn over the next year are still pretty low. But they probably go up thereafter.”

Nothaft, who plied his trade at Freddie Mac, a Fannie Mae rival, said the risk of a downturn isn’t great in 2020 or even 2021. “I’m not worried about this year at all,” he added. Berson said he doesn’t think a recession is in the offing until late 2021 or 2022.

While many observers are concerned about the impact of student debt on people’s ability to purchase homes, Nationwide’s Berson finds auto lending is equally as worrisome. He points to data from the New York Federal Reserve Bank that said that a third of the car loans made last year went to borrowers with a 660 credit score or less, and 20 percent were to people with scores below 620.

“These are really marginal credit risks,” he said. “And as a result, the delinquency rate in the sector is higher than it’s been in 15 years.”

If or when a recession occurs, housing can be expected to resume its traditional role of leading the economy back to full health, said Dietz. It was housing that brought the economy to its knees in 2008, but he explained the differences this time.

“Household balance sheets are in pretty good shape, there hasn’t been a lot of overbuilding, and house prices are up only 4 percent as compared to 7 percent prior to the last downturn,” he explained.

Even though a recession seems to be far off, builders still face a number of other issues. Among them are affordability problems as rising prices continue to outpace income growth, a chronic lack of labor to build homes, a shortage of buildable home sites, ever more expensive building materials and a dearth of the acquisition, development and construction financing needed to buy land and put in streets, sewers and other infrastructure for erecting houses.

“Ongoing job creation and solid household formations will keep demand firm,” Dietz told reporters, “but builders continue to grapple with supply-side headwinds that will dampen more vigorous growth.”