Orlando – Recent tax reform will lead to a more favorable tax climate for the business community, which should spur job and economic growth while keeping single-family housing production on a gradual upward trajectory.
The message was delivered by a trio of economists providing an economic forecast at the NAHB International Builders' Show in Orlando, Fla., Tuesday.
“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 NAHB Chief Economist Robert Dietz. "Ongoing job creation, expected wage increases, and tight existing home inventory will also boost the housing market in the year ahead."
According to Dietz, tax reform could lead to 1 million workers entering the labor force during the next 10 years.
But 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.
Regulatory costs, including building codes and land use, have jumped 29% in the past five years creating another negative impact on housing affordability. Additionally, U.S.-Canada softwood lumber trade dispute has increased the price of softwood lumber by 20% in the past year.
As the economy continues to strengthen, NAHB expects 30-year fixed-rate mortgages will average 4.31% percent in 2018 and 4.82 percent in 2019. NAHB is also projecting 1.21 million total housing starts in 2017 and expects overall production to grow an additional 2.7 percent 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 percent to 940,000 next year. Also, 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.
NAHB is expecting multifamily 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.
Residential remodeling activity is expected to register a 7% gain in 2018 over last year, according to the NAHB. This is somewhat driven by a lack of mobility as homeowners decide to stay put and spend on renovation as opposed to purchasing a new home. NAHB expects just a 3% in remodeling activity for 2019.
David Berson, senior vice president and chief economist at Nationwide Insurance, said the vast majority of local housing markets are healthy and faring well. He listed 324 markets as positive, 69 as neutral, and just 7 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. And mortgage credit, while more readily available than just a few years ago, remains far limited relative to the market peak in 2007.
Mortgage rates, and more
Berson forecasts that mortgage rates will increase from 4% to 4.5% by the end of 2018. “However, housing demand remains strong and wages are solid, and this will more than offset the negative effects from rising rates," Berson noted.
CoreLogic Chief Economist Frank Nothaft also expects mortgage interest rates and home prices to post moderate increases in 2018, which in turn will lessen housing affordability. He also expects the benchmark 30-year fixed-rate mortgage to increase to 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 are occurring in the South and West, where many of these metro areas have good job growth, good affordability and good weather. Nothaft listed Houston, Dallas, San Antonio, Austin, Phoenix, Atlanta and Charlotte as the top seven major markets in terms of new home sales.
Nothaft also 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.