The year 2013 has been a good one for the housing sector. Housing typically plays a leading role during an economic recovery, as lower interest rates increase sales and building, which in turn produces a virtuous cycle of job creation and additional growth. That role was diminished after the Great Recession due to an inventory challenge that was exacerbated by a historic drop in demand. But after a number of false starts, a true recovery in housing took hold in 2012 and continued this year.
Rising home prices have lifted millions of households out of negative equity, helping to reduce the rate of foreclosures. Existing home sales have increased, allowing families to move to new jobs or obtain new housing to meet the needs of children, empty nest status or other changes. And residential construction has grown, boosting national economic growth and job creation.
With a few additional favorable economic developments, 2014 promises to build on these gains.
First, additional multifamily housing is needed. Elevated demand for rental units, seen, for example, in the fact that real rents are up 1.1 percent over the last year, means a need exists for new multifamily housing, particularly in urban areas where jobs are being created. However, the rate of this growth will be smaller than the last two years as some housing demand transitions to single-family units.
Additional growth for remodeling offers an opportunity to improve the energy efficiency of the nation's aging housing stock. The volume of home improvement spending grew about 3 percent in 2013, and a recent National Association of Home Builders survey of remodelers suggests additional growth is expected in 2014. Remodeling tends to track the ebb and flow of existing home sales, so current year-over-year gains for home resales are a positive indicator for remodeling.
An ongoing challenge for the housing market has been weakness among first-time buyers. For example, the National Association of Realtors reported that first-timers constituted only 28 percent of existing home sales in October, compared to a historical rate of about 40 percent. To jump start the first-time buyer market, our economy needs robust labor market improvement for those in their 20s. This means more job creation and wage growth for those leaving school, factors that have been lagging since the end of the Great Recession.
An improving labor market in turn will help the so-called boomerang generation – young people who have returned to their parents' homes due to poor economic conditions. Household formation has been weak in recent years, which holds back demand for both owner-occupied and rental housing. Increasing job creation and wage growth for younger workers will help reverse these trends, including growing impacts from student loan debt.
Rising household formations should – finally – push total annual housing starts over the 1 million mark in 2014, the first such year since the recession. The home building sector, while having improved since 2011, represents an ongoing source of potential economic growth. From the third quarter of 2012 to the third quarter of 2013, expansion in residential construction was responsible for a full quarter of U.S. GDP growth. And home building and remodeling is literally made in America. Construction of 100,000 single-family homes creates enough economic activity to support more than 300,000 full time jobs, half of which are outside the construction sector.
However, to create jobs and construct homes, builders must have access to developed lots and financing. Lack of ready-to-build lots has been a challenge since the end of the recession. In part, this shortage is due to the tight conditions for Acquisition, Development, and Construction loans, so called AD&C loans. While the AD&C market showed signs of improvement in 2013, additional easing of credit conditions will help spur economic growth in many parts of the country.
Finally, government policy could help housing in 2014. Long standing and effective tax policies, like the mortgage interest deduction and the Low-Income Housing Tax Credit, were under debate in 2013. Ensuring the existence of these programs is important for the coming year. In addition, a bipartisan compromise for establishing a permanent solution for housing finance that replaces Fannie Mae and Freddie Mac with a new system that ensures a federal backstop and the 30-year fixed rate mortgage would provide stability for housing demand.
And Congress could remove a significant headwind for housing and the rest of the economy by resolving the recurring debt and deficit debate that has produced recent unnecessary economic crises, harming consumer confidence and complicating long-term economic decision making. An economic agenda that places a priority on growth and investment is an excellent long-term strategy to tackle economic imbalances. Such a commitment would be positive for housing, which in turn would provide additional jobs and income to an economy that needs a boost.
Robert D. Dietz is an economist with the National Association of Home Builders. Previously an economist with the Congressional Joint Committee on Taxation, Robert writes on housing and policy issues at NAHB's Eye on Housing blog and @dietz_econ on Twitter.