The newly enacted tax law will create a more favorable tax climate for the business community, which should spur job and economic growth and keep single-family housing production on a gradual upward trajectory in 2018, according to economists speaking recently at the NAHB International Builders’ Show® in Orlando, Fla. “We expect that tax reform will boost GDP growth to 2.6% in 2018, and this added economic activity will also bode well for housing, although there will be some transition effects in high-tax jurisdictions,” said Robert Dietz, chief economist for the National Association of Home Builders (NAHB). “Ongoing job creation, expected wage increases and tight existing home inventory will also boost the housing market in the year ahead.”
However, builders will continue to deal with ongoing supply-side headwinds this year that will dampen more robust growth. These factors include an increasing number of unfilled construction jobs, a shortage of buildable lots, and a slow growth in acquisition, development and construction loan activity that is failing to keep pace with rising demand.
In addition, regulatory costs stemming from building codes, land use, environmental and other rules have jumped 29% in the past five years, which has had a significant impact on housing affordability. The ongoing U.S.-Canada softwood lumber trade dispute is further exacerbating the situation, as the price of softwood lumber has increased 20% from a year ago.
As the economy continues to strengthen, NAHB expects 30-year fixed-rate mortgages will average 4.31% in 2018 and 4.82% in 2019. NAHB is projecting 1.21 million total housing starts in 2017 and expects overall production to grow an additional 2.7% this year to 1.25 million units. Single-family starts are expected to rise 5% in 2018 to 893,000 units and increase an additional 5% to 940,000 next year.
Setting the 2000-2003 period as a benchmark for normal single-family housing activity when single-family production averaged 1.3 million units annually, single-family starts are expected to gradually rise from 63% of what is considered a typical market in the third quarter of 2017 to 73% of normal by the fourth quarter of 2019. On the multi-family side, NAHB is expecting starts to edge 1.6% lower this year to 354,000 units from a projected 360,000 total in 2017. This is a sustainable level due to demographics and the balance between supply and demand.
Meanwhile, home remodeling is posting strong market conditions, due in part to increased demand in the wake of the terrible hurricane and wildfire season in 2017. Residential remodeling activity is expected to register a 7% gain in 2018 over last year.
Delving beneath the national numbers, David Berson, senior vice president and chief economist at Nationwide Insurance, said the vast majority of local housing markets are healthy and faring well. Berson lists 324 markets as positive, 69 as neutral and just seven as negative. While job gains, household formations and mortgage markets still look good, he noted that rapid price increases are concerning.
Comparing current conditions with the housing boom a decade ago, Berson noted that the market is supply constrained today, but wasn’t during the boom. In addition, mortgage credit, while more readily available than just a few years ago, remains far limited relative to the market peak in 2007. While he anticipates a slightly more rapid rise in mortgage interest rates this year, Berson said it should not hurt housing activity.
“Mortgage rates are expected to rise from 4% to 4.5% by the end of year,” he said. “However, housing demand remains strong and wages are solid, and this will more than offset the negative effects from rising rates.”
Frank Nothaft, chief economist for CoreLogic, also expects mortgage interest rates and home prices to post moderate increases in 2018, which in turn will lessen housing affordability. Like Berson, Nothaft expects that the benchmark 30-year fixed-rate mortgage will average 4.5% by the end of the year.
“Higher rates are not just a gradual erosion of affordability, but also impact owner mobility,” said Nothaft. “That has implications on the overall inventory for sale. Supply has been tight and for-sale inventory will continue to remain tight.” The ongoing tight inventory in the housing market will cause home and rent price growth to outpace inflation, he added, with nationwide home prices rising an average 5% and rental prices posting a 3% increase.
The biggest growth for new home sales is occurring in the South and West, where many metro areas have good job growth, affordability and weather. Nothaft listed Houston, Dallas, San Antonio, Austin, Phoenix, Atlanta and Charlotte as the top seven major markets in terms of new home sales. Meanwhile, he reported that overall mortgage delinquency and foreclosure rates are at their lowest levels in more than a decade, but that is a different story for markets pummeled by last year’s devastating hurricanes.
“Houston’s delinquencies almost doubled year-over-year, and that is due almost entirely to Hurricane Harvey,” said Nothaft.