Homebuilder economists call the bottom again this year
Homebuilders are optimistic by nature. I have been to many economic forecasts, and homebuilder economists always tell their audience the demand for homes will far outpace the supply. There is always a chronic shortage of housing according to homebuilding economists, and homebuilders must step up to meet this need. Homebuilders are like any other seller prone to hear what they want to hear and pay for economists to tell them the same.
Unfortunately, homebuilder economists have been consistently wrong. Homebuilders overbuilt homes to meet the false demand of the housing bubble while economists were telling them they were fulfilling years of pent-up demand. Most homebuilders were completely blindsided by the collapse of the housing bubble. Homebuilder economists as a group were the worst offenders. Just like the NAr, homebuilder economists called the bottom last year. Undaunted by their completely inaccurate forecast of a bottom in 2011, homebuilder economists are calling the bottom again in 2012. If they keep calling the bottom every year, eventually they will be correct.
ORLANDO — Every year around this time, tens of thousands of housing industry professionals gather at the National Association of Home Builders’ convention, usually held in Florida, to talk shop and network with other builders, marketers and suppliers.
One of the best-attended educational sessions at the International Builders’ Show is the economic outlook talk hosted by the NAHB’s chief economist, David Crowe. This year, he was joined by Freddie Mac Chief Economist Frank Nothaft and David Berson, chief economist with mortgage insurer PMI Group, to discuss their predictions for the economy, and the tone was what one might call penitent optimism.
Why penitent? Because last year, Mr. Crowe called the bottom of the new-home market, and he was off in a big way. For 2011, Mr. Crowe predicted that single-family housing starts would tick up to 575,000 and new-home sales would rise to 405,000. Instead, both of those figures fell to all-time lows, with builders starting only 428,600 new single-family homes, and sales clocking in at a dismal 302,000, according to the Commerce Department.
That’s as wrong as wrong gets. Economic forecasting is one of the few professions where you can be completely incompetent and consistently wrong and still make a living by telling people what they want to hear — politics being another profession where this works….
This year, the trio of economists sounded a more cautious tone. Mr. Crowe predicted a 16% improvement in 2012 for both new-home sales and single-family starts. Moreover, they were able to point to improvements in several economic indicators: GDP growth, unemployment rate, private-sector job-creation, and consumer sentiment. One issue they all agreed upon is that household formation has got to go up in order for the new-home market to improve, and that’s likely to happen in the next year.
We need household formation to create demand, but these new households must also have good credit, sizable savings, and the desire to own homes. While we will likely see increased household formation in 2012 — population increases mandate some new household formation — its not clear these new households will be ready, willing, and able to buy new homes. In fact, I rather doubt they will. Most of these new households will rent.
“Of course, as we know, the real savior of housing is demographics,” Mr. Crowe said, citing a pent-up demand for 2 million homes by households that are doubled-up or waiting to buy a home, according to NAHB estimates. Those potential homebuyers or renters “are in mom’s basement, and let me tell you, that’s not a sustainable lifestyle, not for mom, and not for them.”
Whenever I hear a real estate forecaster talk about pent-up demand, I immediately know they are full of shit. As I noted in Desire is Not Demand, “The last line of defense for the housing bulls is the fallacy of pent-up demand. Belief in this fallacy relies on people’s inability to distinguish between desire and demand.” At this point with the bitter taste left from the housing crash, I don’t think the doubled-up households Mr. Crowe believes will create new house demand has the desire to own real estate. Perhaps these people could best be described as “potential pent-up desire.”
Mr. Nothaft, of government-sponsored mortgage giant Freddie Mac, started his talk by pointing out the high level of affordability that exists today. Forecasting that mortgage rates will rise to just over 5% by the end of 2013, he expressed sympathy with the frustrations felt by the builder community.
“If I put this affordability into a model, I would have home sales through the roof! But as we know, they’re not through the the roof,” he said. The reason is serious “headwinds” facing the industry, including sapped consumer confidence, more than 400,000 excess unsold homes at the end of 2011, and a still-high jobless rate. The good news, though, is that “in the first half of 2012 we’ll see a lot of the [unsold] inventory bottom out.” Another year, another bottom called.
The reporter is right to be cynical. The irrational exuberance of homebuilders is comical.
Mr. Berson, of PMI Group, also focused on household formation as a key number to watch in 2012. He predicted an average of about 1.1 to 1.2 million housing starts per year over the next 10 years — which would be close to what economists consider a “healthy” level of construction — minimal growth in second and vacation homes, and a strong household growth in the South, Great Plains and Rocky Mountain states. He cited numbers showing that between 2007 and 2011, the number of households that are “doubled up,” or have grown children or other potential household heads living with their relatives in the same house, grew from 20 million to 22 million. About 6 million of these housemates are young adults aged 25-34 living with their parents.
“They don’t want to live with you. You don’t really want them living with you,” Mr. Berson told the mostly middle aged and older audience. “They will move out as fast as they can. Unless you make it easy for them [to stay]. Don’t make it easy for them. Help your other home builders kick them out.”
One way builders have been trying to do that is by “right-sizing” their homes, or building smaller, more efficient dwellings that are more appealing the supposedly more urban-minded and environmentally conscious young buyers, who are referred to as “Generation Y” or the “echo boomers.” In fact, many of educational sessions at this year’s IBS show are devoted to how to design homes that are more appealing to Gen-Y buyers.
I have attended these lectures as well, and I don’t believe the next generation wants smaller homes. They will settle for smaller homes because McMansions are too expensive, but this is an accommodation to the realities of infill building where land values are high. The only people demanding small condos within walking distance of train stations are those who can’t afford the McMansion near their workplace. It’s not a preference, it’s a substitution.
Another common trend in new home design that is the focus of this year’s show is multi-generational housings, or building homes that have separate rooms or wings for grandparents, in-laws, and recent college grads in search of a crash pad, a design trend that seems to run counter to builders’ goal of selling as many new homes as possible to as many new households as possible.
But Mr. Berson argued that multi-generational housing is short-lived as a trend. “In three or four years there will be a lot less emphasis on multigenerational housing.”
I think Mr. Berson is wrong. I believe the demand for multi-generational housing is just beginning. Homebuilders do not want to see this become a trend because they will sell fewer homes, but the high cost of living and an increasing need for elder care will increase the demand for multi-generational housing.
Homebuilding will recover slowly
Back in the early 90s, homebuilding and the land development industry had a mild recession. It seemed really bad at the time, but compared to the last 5 years, it was a time of prosperity.
I heard a builder at a recent event state that compared to 2005 he is building 10% of the homes with 10% of the staff and selling them at 50% of the price. That is not a state of affairs likely to make industry insiders happy. The good news is 2012 will show improvement over 2011. The bad news is, we still may not get up to the level of the worst lows of the 1992 recession.