According to economists speaking at the National Association of Home Builders annual conference in Las Vegas this week, mounting housing affordability concerns in the U.S. coupled with supply-side constraints will limit single-family output to modest gains in 2019.
"Ongoing job creation and solid household formations will keep demand firm, but builders will continue to grapple with supply-side headwinds that will dampen more vigorous growth in the single-family sector," said NAHB Chief Economist Robert Dietz.
Specifically, builders are dealing with a chronic lack of construction workers; a shortage of buildable lots; onerous regulations; tariffs on lumber and other key building materials; and a slow growth in acquisition, development and construction loan activity that is failing to keep pace with demand.
All of these factors, plus home price appreciation over the past year that has outpaced wage gains, are contributing to rising affordability woes in the housing sector.
The NAHB/Wells Fargo Housing Opportunity Index released last week shows that housing affordability continues to hover at a 10-year low, with 56 percent of households able to afford a median-priced home in the fourth quarter of 2018. But a closer look at the numbers reveals that the affordability rate fell to 35 percent when only factoring in newly-built homes.
One bright spot is townhome construction, which can serve as a useful bridge for young buyers to transition to homeownership, is expanding at a robust 24 percent annualized growth rate.
Interest rates are anticipated to gradually rise, as NAHB expects 30-year fixed-rate mortgages will average 4.81 percent in 2019 and 5.08 percent next year.
NAHB is projecting 1.26 million total housing starts in 2018, and expects overall production to inch up 0.8 percent this year to 1.27 million units.
Single-family starts are expected to hit 876,000 units in 2018, and rise an additional 2 percent to 894,000 this year. That's still well below the 1.1 to 1.2 million units that demographics would support. Some of this shortfall is being made up by increased use of accessory dwelling units.
On the multifamily side, NAHB is expecting multifamily starts to hit 386,000 units in 2018 and level off two percentage points to 379,000 this year. This rate of production is considered sustainable due to demographics and the balance between supply and demand.
Meanwhile, residential remodeling activity is projected to increase in the future, but at a softening rate of 4 percent growth in 2019 followed by a 2 percent gain in 2020.
South and West are Hot Spots
Delving beneath the national numbers, the South and West are the regions that will lead new-home growth in the year ahead, according to Frank Nothaft, chief economist at CoreLogic.
"Metros with good affordability, good job growth and good weather have had the highest growth in new-home sales over the last year," said Nothaft.
New-home sales are rising fastest in the South. Leading the way are Houston, Dallas, Atlanta, Phoenix and Austin, Texas, which all averaged more than 1,000 new-home sales per month between Nov. 2017 and Oct. 2018.
Lafayette, La.; Ocala, Fla.; Wilmington, Del.; Coeur d'Alene, Idaho; and Lakeland, Fla. were the metropolitan areas that posted the highest new-home growth in terms of percentage increases over the 12-month period ending on Oct. 2018.
Nothaft added that builders continue to be hampered by rising labor and construction costs.
Recession Not in the Cards
Looking at the big picture, David Berson, senior vice president and chief economist at Nationwide Insurance, said there is a low risk of a near-term recession. However, he said that economic growth is expected to slow modestly this year in response to trade/tariff issues, higher interest rates and diminishing fiscal stimulus from the 2017 passage of the Tax Cuts and Jobs Act.
Berson expects the Federal Reserve to tighten interest rates two or three times this year, with fewer moves in future years. This anticipated action, along with inflation edging higher, should result in a modest rise in 30-year mortgage rates in 2019.
In a sign that a recession is not imminent, Berson observed that the spread between the 10-year and 1-year Treasury notes have narrowed and flattened significantly over the past year, but the yield curve is not inverted. An inverted yield curve means that the yields on bonds with a shorter duration are higher than the yields on bonds with a longer duration.
Berson noted that the best leading indicator of a recession is a yield curve that fully inverts for about three months. Even then, there is usually a lag time of 12 to 18 months following an inverted yield curve before a recession hits.
"The start date for the next recession is uncertain, but the odds rise as we look out two to three years," Berson said.