Forecasting a 112% increase for housing starts between 2011 and 2014 sounds pretty aggressive. But it’s not really, say David Shulman and Jerry Nickelburg, senior economists with UCLA’s Anderson School of Management, which recently released its latest projections for the economies in the U.S. and California over the next few years.
Shulman estimates that national starts will increase by nearly 25% in 2012 to 763,000, and then grow by more than 70% over the next two years to exceed 1.3 million in 2014, of which more than 400,000 starts will be multifamily.
The economists note, though, that their estimates for 2014 are relatively conservative, given that conventional wisdom has long been that the U.S. needs to build 1.5 million housing units annually to keep pace with population growth and replacements. What Anderson is actually predicting, says Shulman, is movement from "depression level" starts in 2011 (612,000 units) and "recession level" starts this year, to "what’s been the 20-year normal" in 2014.
Shulman doesn’t foresee mortgage lending impeding that growth. "There’s plenty of capital out there" for mortgages, he says. "The real issue is credit standards," and as lenders recognize that the housing market is stabilizing, Shulman expects them to loosen up a bit, "although we’re not going back to ’06; nobody wants that."
Ironically, the Anderson School expects housing to perform much better than the economy as a whole. It projects the gross domestic product to tick up by less than 2% this year, above 2% next year, and possibly in excess of 3% in 2014. The good news, says Shulman, will be that "unemployment won’t get worse," and he foresees the country averaging 160,000 new jobs per month next year, and 200,000 per month in 2014.
Certainly, there have been plenty of indications of late that the housing market is clawing its way back to respectability. In Southern California, for example, home sales in August, at 22,438, were 14.2% higher than the same month a year ago, according to estimates by the real estate firm DataQuick, whose president John Walsh told the Los Angeles Times last week that he expects "strong seasonal sales" to "kick in" this fall.
The Times also quotes the Center for the Continuing Study of the California Economy, which reported last week that the state’s construction sector added 5,100 new jobs in August, driven primarily by improvements in the housing market.
Growth in California’s housing sector over the next two years is likely to be sparked by demand for multifamily, especially among the millenial cohort of buyers and renters. "Job creation in California is being driven by the tech boom, and as there’s more job growth, younger people will demand more multifamily that’s closer to where they work," says The Anderson School’s Nickelburg. He projects annual increases of 19%, 29%, and 100% in multifamily permits pulled by builders and developers, to 69,100 in 2014, which would exceed the 60,200 single-family permits he forecasts for that year.
While those percentage increases might seem impressive, Nickelburg cautions that the actual numbers would simply return the state to the level of construction activity it had enjoyed in the mid 2000s.
Any forecasts can be derailed, though, by external factors, and Nickelburg says he’s keeping a close eye on two things: the so-called "fiscal cliff," which if Congress doesn’t agree on budget cutting measures will kick in in January and automatically cut $600 billion—4% of the country’s GDP—from the budget; and what’s going on with Europe’s currency, which could have global implications if it implodes.
"We don’t think either of these things is going to happen," he’s quick to say.
Reprinted with permission from Builder, a publication of Hanley Wood © September 2012