Homebuyers should find plenty of new homes to choose from in 2018. Not as many as the market can bear, perhaps, but more than last year or the years before.
The National Association of Home Builders (NAHB) is predicting that its members will begin work on 893,000 single-family houses over the next 12 months. That’s on the low side when compared to forecasts by other key housing prognosticators.
Despite the usual headwinds that have been slowing builders over the last few years — shortages of skilled construction workers and building lots, plus rising prices for several key building materials — the NAHB is expecting single-family starts to increase 5 percent from last year’s estimated 864,000 starts. And for 2019, the group’s outlook is for 940,000 single-family starts, another 5 percent gain.
But it still not enough, says NAHB’s Chief Economist Robert Dietz. “That’s only 73 percent of what we think is sustainable, what we need in order just to keep up with household growth,” he said at the group’s annual convention and expo in Orlando in early January. Under what he calls “normal” conditions, builders could be putting up 1.34 million housing annually, which was the average for production in the four-year period between 2000 and 2003.
Including rental and for-sale apartments and teardowns, Dietz is looking for his flock to put 1.25 million units on the market this year. Teardowns, in which one new house replaces an older, outmoded residence, don’t add to the housing stock, but they do improve the stock, which is forever aging.
But other prognosticators are even more upbeat.NAHB is expecting single-family starts to increase 5 percent from last year’s estimated 864,000 starts. And for 2019, the group’s outlook is for 940,000 single-family starts, another 5 percent gain.
Frank Nothaft, Dietz’s counterpart at housing analytics firm CoreLogic, is calling for 1.29 million overall starts this year. And David Berson of insurer Nationwide is expecting 1.28 million. Both economists formerly held the same posts, respectively, at mortgage giants Freddie Mac and Fannie Mae.
Fannie Mae, meanwhile, is predicting builders nationally will have pulled permits for 1.3 million units by year’s end and Wall Streets’s Goldman Sachs is higher still at 1.333 million. Mark Zandi, chief economist at Moody’s Analytics, says 1.8 million starts is possible.
These projections and other slightly less optimistic ones are being offered despite persistent problems faced by builders. One of the most consistent is the lack of workers to build houses, an issue that has been exacerbated by the Trump Administration’s stand on immigration. The shortage of skilled, trained and proven craftsmen is invariably cited by builders as a major problem in survey after survey.
Dietz of the NAHB says not only is the construction workforce smaller than it was prior to the 2008 economic recession — a time when many workers left construction altogether to find jobs in other fields — but there are more open, unfilled jobs as a share of the workforce that at any other time.
“Worse,” he says, the situation “doesn’t look like it’s going to change much over the next few years.”
In talking to 300 homebuilding executives recently, John Burns Real Estate Consulting found that labor costs are escalating as builders pay up to find and keep members of the construction trades. “Stronger than expected sales have pushed the trades to the limit,” said Burns’ analysts Jody Kahn and Devyn Bachman.
Land prices continue to rise, too, as builders pay dearly for fewer and fewer home sites on which construction can start right away. But the builders the Burns firm talked to said they were all but blindsided by the size of the increase in the cost of building products.
Although they said they anticipated some increases, the extent of the bumps were shocking, especially when it came to lumber, drywall and concrete. The cost of softwood lumber, for example, is up 15 percent from January 2017, according to the NAHB.
All of this suggests that despite the larger number of homes for sale, they will be more expensive in the years to come. But price increases may not be so bad, according to Dietz, who has scaled back his projections for prices, suggesting they will rise only 2.9 percent this year before moving up at a greater pace in the ensuing years.
But Berson of Nationwide expects prices to be up by 6 percent by year’s end and Nothaft at CoreLogic is looking for 5 percent to 6 percent price growth this year.
Mortgage rates also should be on the upswing. The Federal Reserve Board has already signaled further tighten of the federal funds rate, which is the rate banks charge one another. At its December meeting, 14 of the 16 members of the Federal Open Markets Committee said the rate should be ratched up four times in 2018 to 2.75 percent.
Berson pointed that the financial markets believe the Fed will tighten only once or twice at most. But “they are wrong,” he said. “We think the Fed will boost the funds rates three or maybe four times.”
As far as long-term mortage rates are concerned, Nothaft expects a half to three-quarter point rise in rate to perhaps 4.5 percent by year’s end. To put that into perspective, it’s the same rate lenders were charging in 2013 and less than the 5.1 percent rate recorded in April 2011 and 6.5 percent for the entirety of 2008.
And the ever-optimistic NAHB has the 30-year fixed-rate mortgage at 4.8 percent by the end of 2019.
Lew Sichelman is a nationally syndicated housing and real estate columnist. He has covered the real estate beat for more than 50 years.