NAHB: Single-Family Production Poised to Take Off in 2015

According to the NAHB's 2014 Fall Construction Forecast Webinar on October 31st, "a growing economy, rising household formations, low mortgage rates and pent-up demand will help single-family housing production to rev up in 2015 while a growth in renters will keep the multifamily market at cruising altitude or higher."

From the press release:

NAHB is forecasting 991,000 total housing starts in 2014, up 6.6 percent from 930,000 units last year. Single-family production is expected to rise 2.5 percent this year to 637,000 units, increase an additional 26 percent next year to 802,000 and reach 1.1 million in 2016.

Setting the 2000-2003 period as a benchmark for normal housing activity when single-family production averaged 1.3 million units annually, single-family starts are expected to steadily rise from 48 percent of what is considered a typical market in the third quarter of 2014 to 90 percent of normal by the fourth quarter of 2016.

Multifamily starts, which NAHB Chief Economist David Crowe said are now at a normal level of production, are projected to increase 15 percent in 2014 to 356,000 units and hold steady next year.

Meanwhile, the NAHB Remodeling Market Index, which averages ratings of current remodeling activity with indicators of future activity, matched its all-time high of 57 in the third quarter of 2014 and has been above 50 for six consecutive quarters. A reading above 50 indicates that more remodelers report market activity is higher (compared to the prior quarter) than report it is lower.

NAHB is forecasting that residential remodeling will post a 3.4 percent decline in 2014 over last year, due in large part to slow activity in the first quarter caused by an unusual harsh winter throughout much of the nation. Residential remodeling activity is expected to rise 2.7 percent in 2015 and an additional 1.3 percent in 2016."

Changes to home mortgages seem inevitable

As I sit here and write this post, the U.S. national debt is climbing past $14.25 trillion, or an average of nearly $46,000 for each citizen. Each day, that national debt rises by about $4.1 billion, as 40% of the 2011 federal budget is made up of borrowed money. Of the Obama Administration’s proposed $3.7 trillion budget for 2012, 30% will go to Medicare and Medicaid, 22% will pay for Social Security benefits, 19% will go for defense-related programs and nearly 13%, or $474 billion, will be used to service the existing debt. So just what does that have to do with mortgage finance? Everything.

For starters, in order to reclaim up to $131 billion in annual foregone tax revenue, the National Commission on Fiscal Responsibility and Reform has the long-standing mortgage deduction in its crosshairs, to be replaced by a 12% tax credit that would help those who don’t itemize their deductions but punish many who do. Not surprisingly, trade groups representing real estate agents and home builders have strongly opposed the idea for a number of very solid reasons.

Meanwhile, however, the leaders over at AARP are also fighting against any changes to Medicare or Social Security that would anger their 40 million-plus members, while lobbyists for defense firms visit Capitol Hill to offer dire consequences resulting from defense cuts. But if no one budges at all and simply throws up walls of discontent at the mere mention of changing the status quo, how do we ever fix this huge – and escalating – problem?

It’s in times like this that true leadership is required, and for the building industry that may require some compromises on not just the tax deduction, but also the nature and duration of home mortgages. Instead of being purely re-active, what if the leaders of NAHB and NAR were pro-active enough to discuss some type of gradual and reasonable changes to the tax code – such as grandfathering in existing owners and leaving it in place under certain conditions to promote homeownership -- but only if commensurate changes are also made to entitlement programs and the defense budget?

Those who want to see the deduction disappear argue that other countries such as the United Kingdom and Italy have phased out their own tax deductions for homeownership and survived – and Canada’s housing market has done quite well without one at all – but those countries’ mortgage markets remain largely the domain of banks, and not of investors buying securities. In the U.S., it’s a different story. That’s also why the fate of the mortgage tax deduction and the market itself – including the phasing out of Fannie Mae and Freddie Mac -- are so closely intertwined.

For a fully private investor such as Bill Gross of Pimco in Newport Beach, CA to buy mortgage bonds, he’s been quoted as demanding a 3% premium to compensate him for his risk. But Moody’s Analytics economist Mark Zandi and a colleague have instead offered up a sort of public-private hybrid solution that would have government insurers act as market intermediaries for mortgage securities but maintain a large bail-out fund and ensure reserve capitals can withstand steep price declines. They claim their plan would keep interest rates competitive while boosting sales, prices and homeownership.

Whatever the outcome, it seems highly unlikely that the system which led to the unraveling of the housing market – and the global economy – will ever return in the same form it was before. Into that vacuum, builders and agents will have no choice but to support eventual reforms that support not just their own businesses, but also the country in which they live. The clock is ticking.

Economist Mark Zandi says recession will end this year

Economist Mark Zandi, co-founder of Moody's Economy.com and author of the book Financial Shock (which I reviewed last November for Inman News), hosted a webinar last Friday on the state of the economy, and he thinks the recession will officially be over by the end of 2009. From a BuilderOnline.com story:

First, the good news. Mark Zandi, chief economist for Moody’s Economy.com, believes the Great Recession will end this year.

If that’s true, that will surely be welcomed by just about everyone. During this difficult economic period, more than 8 million jobs have been lost. Housing starts have dropped to an annualized level of 500,000 units, down from more than 2 million in 2005. Banks large and small have failed...

Now the bad news for builders. “Housing will not be an early source of growth in this recovery,” said Zandi. “That’s very different from past recoveries,” when housing has typically been a leading indicator of economic growth.

But as the economy regains its footing this year and next, Zandi said growth will happen—and quickly. In 2010’s fourth quarter, for example, he forecasts housing starts to return to an annualized pace of 1 million units, and a 1.6-million-unit annualized level in 2011’s fourth quarter. “Once we work through the impediments to demand, I do think we’ll see substantial pickup in economic activity in 2011 and 2012,” he said.

Still, housing represents a major risk to Zandi’s view that the recession—generally defined as two consecutive quarters of decline in real gross domestic product (GDP)—is nearly finished. If home prices continue to fall and foreclosures continue to rise, the recession will linger. “This is the one I am most worried about,” said Zandi, who is concerned that the Obama foreclosure mitigation efforts will not be successful—or successful enough. “I am increasingly worried that these impediments [to refinancing and modifying mortgages] cannot be overcome.” (The economist did not address these obstacles or what the solutions might be during the teleconference.)

That would seem to bode ill for places such as California, where housing’s boom has turned into a foreclosure bust. But Zandi, who developed a reputation as a housing bear earlier this decade, sounded more upbeat than one might expect about the Golden State, where the state has begun issuing IOUs. “California will probably turn with the rest of the United States,” he said. “The housing problems there were much less severe than in Florida, and Californians have been conditioned to believe that if they buy housing at low prices, they will be rewarded over a 10-year period. … They are more willing and able to get into the housing market.”

Zandi also had positive words for Texas, which has been a major market for builders large and small. “Texas will recover more quickly,” he said. “It doesn’t have the serious housing overhang that California and Florida have, and energy will be a source of growth for the state.”

Floridians, on contrast, should brace themselves for a long, slow walk back to economic health. “Florida will be one of the last states to get out of the recession,” Zandi predicted. It has a serious oversupply of housing, both single-family and condos, particularly in South Florida. “Migration flows have dried up. It’s very reliant on travel and tourism, which will remain impaired [economically].”

Housing prices to bottom in 4Q 2009?

Although we've heard many optimistic scenarios from economists predicting when housing prices will reach bottom, an analysis from Mark Zandi, chief economist for Moody's Economy.com is predicting the fourth quarter of this year. For those of you who might have recently watched Dr. Zandi's testimony in front of Congress on the subject of economics and government bail-outs or read his book "Financial Shock" (which I reviewed for Inman News in 2008), he's not ever been a housing bull. From a BuilderOnline.com story:

Zandi, along with his colleagues, think that "a bottom in the housing market is coming into view," according to "Housing in Crisis: When Will Metro Markets Recover?" a paper recently released by Economy.com. "The market's correction to date has been substantial, wringing out many of the excesses that precipitated the crash," the researchers say. "More than three years since the market began correcting, inventories are flattening, prices are coming back down to earth, and sales are approaching stability."

According to research done by Zandi, housing analyst Celia Chen, Credit Analytics Director Cristian deRitis, and Economist Andres Carbacho-Burgos, the housing market's low point probably will come in 2009's fourth quarter, as measured by U.S. national home prices, which will have fallen 36.2% from their peak in 2006's first quarter.

That's a national number, though, which means that some markets will recover sooner and others will lag behind.

For example, Moody's Economy.com researchers project thatSanta Cruz/Watsonville, Calif., will hit bottom in 2009's third quarter, when its home prices will have fallen 44.3% from the area's 2005 peak. Other markets are trending downward. Homeowners in Miami/Miami Beach/Kendall, Fla., will have to wait more than two years—to 2011's second quarter, when home prices will have plummeted 66.4% from their 2007 highs—for their home prices to stop eroding...

Review of "Financial Shock" now online at Inman News

My first writing assignment for Inman News, a book review of the book "Financial Shock" by economist Mark Zandi, co-founder of Moody's Economy.com, is now online. Since the book was published in the summer -- and therefore before the recent stock market swoons and other financial challenges -- I also interviewed Dr. Zandi by phone for his views on the recent events. What I like about Zandi, both over the phone and in his book, is his ability to speak in plain English about complex economic issues. From InmanNews.com:

When Mark Zandi, chief economist and co-founder of Moody's Economy.com, decided to write a book on the implosion of the subprime mortgage industry earlier this year, the global meltdown in the financial markets and impact to the overall economy had yet to surface. Yet because the book is so comprehensive, it still provides an excellent framework from which to understand the root causes of the crisis, from the mistakes made by Alan Greenspan to the rapid rise of irresponsible lenders who rewrote the rules of underwriting based on their own short-term interests...

Click here for full review.

An update on Mark Zandi's book "Financial Shock"

As one of my first freelance writing assignments for the real estate news syndicator Inman News, I'm going to be reviewing the book by Mark Zandi called Financial Shock: A 360º Look at the Subprime Mortgage Implosion, and How to Avoid the Next Financial Crisis.

Zandi, who is also widely quoted as an economic expert in the national press as well as a consultant to the McCain campaign, has been better known as Chief Economist and co-founder of Moody's Economy.com, so he's in a particularly good position to write the book, which provides a comprehensive overview of the sub-prime crisis, the related fall-out and, more importantly, some policy prescriptions for how to avoid similar mistakes in the future.

However, since his book was printed in July it missed out on some of the recent events, so I thought it was important to interview Dr. Zandi for any updates. Some money quotes:

On whether or not a government bailout is a wise move:

"It's guarding against the downside risks, which are quite considerable...If we don't down this path quickly, then the policy choices will get overwhelmed by the magnitude of the problem."

On what's next for the homebuilding industry:

"I would expect it to go through a very significant rationalization, and expect to see more failures, although the big, publicly traded builders are still in business and I don't think that's going to change."

On what else needs to be done to fix the housing market:

"Another write-down plan should be implemented and keep on trying to forestall foreclosures...It's a reasonable way to go to write down the first mortgage to the point that it becomes affordable and guarantee the part that's written down to the lender."

On the current economy:

"I think we've been in a recession for a year and will be through next summer -- about the worst we've experienced since the end of WWII, although perhaps not as bad as the 1982 downturn. I would expect unemployment rates to peak at 8% by early 2010."

Home prices to hit bottom by summer '09?

Yes, it is true that we've constantly been hearing false predictions of when the housing market will hit bottom, both in terms of sales, but more importantly in terms of price. I always tend to consider the source of such predictions, and generally discount those from trade groups such as the NAR or the MBA and give greater credence to universities and private data companies.

But at a recent forum sponsored by Standard & Poor's and the Chicago Mercantile Exchange, a panel of economists actually agreed that we should be seeing some pricing stability return to the market by next summer. From a CNNMoney.com story:

Several panelists, including Economy.com's chief economist Mark Zandi, Goldman Sachs (GS, Fortune 500) economist Charlie Himmelberg, S&P managing director David Blitzer and S&P senior economist Beth Ann Bovino all agreed that home prices would stabilize sometime during the summer of 2009.

"The bottom of the housing market is coming into view," said Zandi, whose recent book "Financial Shock," examines how the subprime mortgage crisis occurred. "House prices, based on the S&P Case-Shiller index, are down 20% peak-to-trough and I expect them to fall another 5% to 10%."

"The key is housing affordability," Zandi said. "The [price] decline is beginning to restore affordability, which is now near its long-term average. In some places, Boston, Chicago, Denver, Orange County, affordability has been restored and those markets have stabilized."...

One piece of good news noted was home sales volume. The number of homes sold each month has already leveled off nationally, staying within a narrow range nearly every month this year at an annualized rate of about 5.5 million units a year.

Bovino said her forecast for home price decline is slightly more bearish than Zandi's, mostly based on S&P's belief that the country is now in a recession. With the economy struggling, job losses rising and a tough lending environment, she expects prices to fall another 10%.

"We think there will be an overshoot [with prices going beyond their logical bottom]," she said, in part because so many buyers are afraid to get into the market. "Nobody wants to catch a falling knife," she said.

And after prices do bottom out, Himmelberg expects them to remain fairly flat for a year or so...

The panelists were careful to couch their optimism with caveats. Zandi, for example, points out that there is a lot of uncertainty about the fate of Fannie and Freddie, in the wake of their government takeover.

There is some speculation that the companies will be downsized by a new administration after the presidential election in November.

The real cause of the subprime lending bubble

There's an interesting post by Annette Haddad at the L.A. Land blog citing a new report issued by UC Irvine's entitled "Subprime Lending and the Housing Bubble: Tail Wags Dog?" The report argues that it was actually the departure of Fannie Mae and Freddie Mac from the lending market in 2003 due to their accounting scandals and related political pressures. From the blog:

When Fannie Mae and Freddie Mac pulled back from the credit markets in 2003 and significantly slowed their lending volume in response to internal accounting problems and outside political pressure, the breach was filled by aggressive securities issuers in the private mortgage market.

And helping to fuel them on was an enthusiastic administration pushing the "dream of homeownership" without a whole lot of regulatory restraint. As a result, total mortgage volume skyrocketed and pushed up home prices "with momentum characteristic of a bubble," the study says.

Although cynics might be put off by the sponsors of the report, which included the Mortgage Bankers Association, the NAR and FreddieMac, I thought it interesting that Economy.com co-founder Mark Zandi also touches on this same subject in his book "Financial Shock: A 360-Degree Look at the Subprime Mortgage Implosion, and How to Avoid the Next Financial Crisis."

More bad news for homebuilders

Attendees at the NAHB Spring Construction Forecast were treated to even more bad news, courtesy of the latest new home stats from The Commerce Dept. From a BuilderOnline.com story by Ethan Butterfield:

New-home sales are down 8.5 percent from February and the months’ supply of new-homes rose to 11 months, a record-high, NAHB chief economist David Seiders told the several hundred audience members in attendance at the NAHB’s headquarters to a chorus of subdued groans and whistles.

And those numbers (http://www.census.gov/const/newressales.pdf) do not count cancellations, which many large builders are seeing at levels of up to 40 percent of sales. In other words, there is far more inventory of new homes than just 11 month’s worth, especially as home sales continue to decline...

Nariman Behravesh, chief economist for Global Insight, said Thursday that total financial losses from the subprime mortgage mess would be about $400 billion, but that only $250-$280 billion of that has been declared so far. That means there may be as much as another $150 billion in losses to come.

“There will be more bad news, and it could create a revisitation of this crisis, but it’s probably the case that the worst is over,” Behravesh said.

Still, housing is far from a recovery, he said. Consumer spending has slowed to a trickle in the first half of 2008, but will likely pick up with the fiscal stimulus’ tax rebates, then will likely trail off again, creating a “W”-shaped recovery, Behravesh said.

“What these rebates are doing is pulling growth forward from next year to this year,” he said.

And if energy prices continue to rise, the fiscal recovery may be undermined, Behravesh said...

Mark Zandi, chief economist for Moody’s Economy.com, said Thursday that 8.8 million home owners are now in just that negative equity position, and that number could rise to over 12 million without federal intervention.

And today’s American doesn’t have the savings to weather the storm, Zandi said.

“If there is any disruption to their income, they’ve got a real big problem,” he said, pointing out that major disruptions in income used to be if somebody lost their job, or there was a divorce or death in the family. Now, needing to replace a hot water heater is the equivalent, because people do not have the excess cash. “They are living on a tenuous financial edge, and they are going to end up in foreclosure, and add to that mountain of inventory.”

And consumers owe far too much money to creditors, with over $700 billion of debt (of all kinds, not just mortgages), in default or delinquency, Zandi said.

“That has more than doubled in the last couple of years, and that’s putting a lot of stress on the system,” he said.

Zandi, now an advisor for Senator John McCain’s Presidential bid, also pitched a three-pronged plan to save housing. First, a temporary tax credit for buying a home. Second, the Federal Reserve could hold reverse auctions for banks to allow credit to flow more cheaply, and so more freely to help the housing market regain its footing. Third, a mortgage write-down plan to save home owners from falling into foreclosure could be enacted...

“In times of crisis, we should use the triple-A credit of the United States,” Zandi said. “If they don’t, (the economic trouble) is not going to be short, it’s going to be a rather painful, prolonged downturn that extends through the rest of the decade.”

Zandi projects new-home sales to bottom in the second quarter of 2008, over 30 percent below their peak levels from the boom. New-home starts are likely to bottom in the second half of 2008 more than 60 percent below their peak level. Home prices will likely finish about 24 percent below their peak levels, and likely not until the second half of 2009, Zandi said.