The Housing Chronicles Blog: Forecast for 2011

Friday, December 10, 2010

Forecast for 2011

Although the National Bureau of Economic Research officially declared the ‘Great Recession’ over in June of 2009, over 18 months later the building industry continues to wait for that proverbial light at the end of the tunnel. Sure, there were some rumblings of activity in the land market in early 2010 as it seemed that a rebound was imminent, but that turned out to be related more to homebuyers taking advantage of tax credits than sound economic fundamentals. So what can we expect in 2011?

For the general economy, the recovery will remain painfully slow, but our colleagues at Beacon Economics are not predicting a double-dip recession because the imbalances we saw during the boom years have been largely wrung out of the system. Nonetheless, as the fiscal stimulus programs of the past two years begin to abate, expect to see more layoffs in the public sector at the state and local levels, as well as officials finally forced to address untenable pension promises. In addition, as the Federal Reserve and Congress begin to reverse historically low interest rates and huge budget deficits, consumer spending – which accounts for more than two-thirds of the country’s GDP – will grow at a reduced pace.

With up to 65% of the earnings for the companies listed on the S&P 500 coming from overseas, domestic job growth will also remain lackluster, so it will take time to replace the 7 million jobs lost in this downturn. Although the U.S. retains the world’s largest manufacturing sector by value, capital investments and increasing productivity will replace many of those jobs, requiring retraining for millions of workers. Yet the good news for construction workers is that although it will take several more years for their jobs to come back, it’s not easy to outsource the building of new communities overseas or replace workers with automated equipment. A year from now, Beacon Economics is forecasting the national unemployment rate to remain elevated at 8.8% and not approach the 8.0% level until the middle of 2013 – well above the levels seen in the boom years, but still representing a slow and gradual decline.

For the real estate market, improvement will vary widely depending on the sector. The first sector to rebound will likely be apartments, led by former homeowners looking to rent as well as the rise of the Echo Boomer population. As the economy improves, people forced to live with each other due to financial issues – such as boomerang children living at home, roommates who have nothing in common, and even former couples who simply share space – will opt for their own households as soon as they can.

Naturally, the rebound for new housing will depend largely on the state of the foreclosure market, which is expected to remain elevated through 2012 even though the rate is flattening out in some hard-hit areas such as Los Angeles. Not surprisingly, discounted foreclosures will continue to pull down median sales prices, but an important caveat here to remember is that many foreclosures offer low-quality housing with missing appliances, damaged interiors and neglected yards. Once those foreclosed homes are eventually flushed through the pipeline, prices could stage a moderate rebound based both on better-quality comps and an improving economy.

Finally, with just about 200,000 unsold units – the lowest since 1968 -- builders have kept a tight lid on inventory, which should help bolster the industry when the rebound occurs. For 2011, the NAHB is forecasting 655,000 single-family starts that should climb nicely to 970,000 starts by 2012. For the multi-family sector, an unforeseen rebound in mid-2009 helped bump up the forecast to 125,000 units by 2011 and 210,000 units by 2012.

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