Housing Outlook Continues to Brighten; Recovery Still Faces Headwinds

Housing MarketThe recent International Builders’ Show in Las Vegas provided generally upbeat reports on the crucial U.S. housing market — an economic indicator closely watched throughout the pool and spa industry. The housing upturn that took root last year is expected to pick up momentum in 2013, but headwinds along a number of fronts could impede the pace of the recovery, according to economists speaking at the show last week.

“Nearly every measure of housing market strength – sales, starts, prices, permits and builder confidence – has been trending upward in recent months and we expect to see gradual but steady growth along these lines in 2013,” said NAHB Chief Economist David Crowe. 

In particular, Crowe said that house prices are up nearly 6 percent on an annualized rate over the past 10 months, and that “this has been a trigger for demand to return. People feel comfortable if they buy a house that it will appreciate, not depreciate, in value.”

Other factors that bode well for the housing outlook include low mortgage rates, strong housing affordability, rising household formations and the fact that two-thirds of U.S. housing markets can now be considered improving, according to the NAHB/First American Improving Markets Index.

For the past five quarters, housing has acted as a net contributor to the economy, steadily increasing its share to 12.8 percent of economic growth in the fourth quarter of 2012.

However, Crowe cautioned that builders continue to face several challenges, including stubbornly tight mortgage lending conditions, inaccurate appraisals, rising materials prices and a declining inventory of buildable lots. 

Moreover, continuing gridlock in Washington over how much more fiscal tightening is needed to stabilize the debt-to-GDP ratio, along with calls by some policymakers for major changes to the mortgage interest deduction, threaten to negatively impact consumer confidence and future housing demand.

The single-family market, which has the farthest to go, was running at 44 percent of normal production in the fourth quarter of 2012. Single-family starts are expected to steadily rise to 52 percent of what is considered a typical market by the fourth quarter of this year and 70 percent of normal by the fourth quarter of 2014.

NAHB is forecasting 949,000 total housing starts in 2013, up 21.5 percent from 781,000 units last year. Single-family starts are anticipated to rise 22 percent from 535,000 last year to 650,000 in 2013, Crowe said. They are expected to jump an additional 30 percent in 2014 to 844,000 units.

At the same time, in places where buyers are ready to go forward with a purchase, persistently tight mortgage credit standards continue to limit the number of creditworthy borrowers from entering the housing market, Benson said. 

“The problem is mortgage lending standards are way too tight,” he said. “If we were at a scale of nine or 10 in 2005-2006, we are at a two today. We want to be around a five.” 

Moreover, Berson noted that several federal agencies will be releasing final rules later this year on a national qualified residential mortgage standard that could further restrict mortgage lending.

Low Mortgage Rates Drive Housing Demand

Qualified buyers who gain access to credit will find affordable home loans, according to Frank Nothaft, chief economist at Freddie Mac. He said that 30-year, fixed-rate mortgages will stay below 4 percent through the end of 2013. 

“An important stimulant driving housing demand has been declining mortgage rates,” said Nothaft. “These are the lowest rates we have seen in 65 years.”

The refinance boom for single-family homes associated with low mortgage rates is expected to continue this year but gradually taper down. While overall mortgage originations are forecast to fall 15 percent in 2013, Nothaft said that home purchase originations will be trending higher, thanks to a projected 8 percent increase in home sales this year.

U.S. house prices increased 4 percent between September 2011 and September 2012, according to the Freddie Mac House Price Index, and this included price hikes in 42 states. By comparison, home price appreciation only occurred in a handful of states during 2010-2011.

Nationwide home prices are expected to rise 2 to 3 percent in 2013, added Nothaft. With the oversupply of vacant homes at their lowest level in a decade, this will further ease downward price pressure.

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