The year 2013 was a positive one for the housing sector, and 2014 promises to see gains in job creation and economic growth.
The final data for 2013 showed significant increases for home building and remodeling activity, as pent-up housing demand was unlocked. Numbers from the Census Bureau and the Department of Housing and Urban Development reveal that total housing starts increased more than 18 percent from 2012 to 2013. For homes built in multifamily properties with five or more units, construction was up almost 25 percent year over year. Such units are mostly rental homes, with this market recovering first as newly formed households typically rent before becoming homeowners.
Nonetheless, the single-family construction sector is also improving. The total number of single-family homes that began construction in 2013 was up more than 15 percent over the prior year. And while final Census data are not yet in for improvement spending, from November 2012 to November 2013 the pace of such remodeling expenditures grew more than 10 percent.
While there has been normal month-to-month volatility in the data (particularly for multifamily homes, for which a three-month moving average presents a better reflection of current trends), one useful robustness check of the housing recovery is the number of homes currently under construction. As of December, the sum of single-family and multifamily units under construction had risen for 28 straight months, confirming a sustained recovery.
Beyond construction, 2013 witnessed rising home prices that lifted millions of homeowners out of underwater status. While positive overall, this appreciation challenged affordability for new homebuyers in some locations as interest rates rose during the fall. Regional differences in price appreciation were driven, in part, by inventory constraints at the local level, as well as the strength of investor demand in some markets.
Recent year-over-year data indicate that home building was responsible for approximately a quarter of net gross domestic product growth. And builders and remodelers added 100,000 much needed jobs in 2013 to the national economy. Adding on these gains, the housing sector is poised to be a significant source of economic growth for the coming year.
Housing remains below normal levels of construction based on population growth and the need to replace older homes. For instance, the median age of owner-occupied homes in the U.S. is 35 years old, according to the 2011 American Housing Survey. The median was only 23 years as of 1985. And 41 percent of the housing stock is currently more than 44 years old.
One tracking of housing's progress to a normal market is the National Association of Home Builders/First American Leading Markets Index or LMI. The index employs measures of home prices, employment and building permits compared to pre-boom years of 2000 through 2003. According to the December LMI's three variables, the housing market is 86 percent back to normal levels, with the building component at only 44 percent of normal levels.
As demand expands with additional job creation, housing construction will grow in 2014. The National Association of Home Builders is forecasting a 24 percent pickup in total housing starts, with even larger gains for single-family. On average, each single-family home built creates enough economic activity to support three jobs for a year, while each multifamily unit and every $100,000 in remodeling sustains one job. These benefits add up. The forecasted growth for housing for 2014 should create more than half a million jobs, with half in construction and the remaining half spread out throughout the rest of the economy.
Potential headwinds certainly existing for housing, however. Rising student loan burdens will hold back some demand for owner-occupied homes, particularly for younger households. Small business lending for real estate development (acquisition, development and construction loans) is improving but remains tight. And the pickup in construction has raised building material prices and created some skill shortages.
Yet other challenges are policy focused. Changes to the Federal Housing Administration loan limits will harm housing demand. Headline debates concerning the future of the housing finance system and tax reform, as well as smaller issues concerning the future of housing-related tax provisions that expired at the end of 2013, can also have impacts in the coming year. And immigration reform could have significant effects for housing demand in the future.
In short, the situation for 2014 is clear. The housing industry is set to have another positive year that will lead to jobs and investment. Absent missteps on policy issues, the housing scorecard for 2014 will show its largest post-Great Recession economic contributions to date.
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'sEye on Housing blog and @dietz_econ on Twitter.