A growing number of economists fear a recession could be on the horizon. Three out of four polled this summer by the National Association for Business Economics predict a retraction will occur by 2021.
The National Association of Home Builders (NAHB) expects the U.S. economy will slow in the next couple of years, with annual growth dipping under 2%. That would be a slow patch or a growth recession in which the economy and employment falter, but not enough to be a technical recession, said Robert Dietz, NAHB’s chief economist.
Dietz took some time to talk with Scotsman Guide about the state of the homebuilding industry and how it could withstand a market decline.
What would a slowdown mean for builders?
We actually got a good test case of what a slowing housing market looks like for the building industry and that began late last year. At that time, it was due to housing affordability. Demand slackened because mortgage interest rates reached 5% last fall. They have since clearly come down, but the wind came partially out of the sails of the building industry beginning last fall, and running through the winter and the first part of the spring [this year].
How was that felt?
We can look at the first-half data. For 2019, we saw single-family starts down through June. They were down about 5% compared to the first half of 2018. So, a noticeable decline. Now, we do think 2019 is going to end the year down just a little bit or flat, because we are going to get a modest rebound in the second half of the year now that interest rates are lower.
Can you talk about the type of building that’s going on?
The top-end custom buildings have been relatively flat. We’ve seen larger declines in large-metro core areas. That is like the center city, inner suburbs and the traditional suburbs of large metro areas. We’ve seen growth in more rural, small-town locations and exurbs.
Why is that?
As housing affordability last fall hit a 10-year low, it was places that had relatively less costly land that were more advantageous in terms of building. The brakes were hit pretty hard on some of those traditional suburbs of high-cost metro areas. For example, Los Angeles is down about 20% year over year in terms of production. The state of California is down about 14% year over year. The growth is in places like Utah and Idaho.
It’s estimated that 1.5 million new homes in the U.S. are needed each year to meet current demand and replace aging stock, correct?
Our estimate used to be 1.8 million, because of declines of population — the population is still growing, just not as fast — but I think 1.5 million is sort of a number that we use to benchmark our forecast. Somewhere between 1.1 million and 1.2 million single-family homes and somewhere between 300,000 and 400,000 multifamily apartment [units]. Our forecast for single-family starts for 2019 is actually a little bit below 860,000. If 1.1 million is what we need for demographic potential demand, the underbuilding that has characterized the post-Great Recession growth cycle continues.
How much underbuilding are we talking about?
Freddie Mac estimates that we’re probably short in terms of housing units [by] about 2.5 million. NAHB did a similar calculation and found the shortage might be about a million units. Whether it’s a million or 2.5 million, you’re talking about a fairly significant shortfall.
If a recession does happen, could new-home construction actually help revive the economy by meeting this unmet demand?
Absolutely. Traditionally, in most business cycles, homebuilding is one of the first sectors to begin expanding when you’re in a recession. The traditional cycle, in general, is [that] housing often feels the pain first because recessions are often preceded by increases in interest rates or declines in housing affordability, due to lack of income growth or higher unemployment.
Housing is often the canary in the coal mine. It declines first. Then what happens is that as interest rates come down, building will then begin to increase.
Robert Dietz is chief economist for the National Association of Home Builders (NAHB), where his responsibilities include housing-market analysis, forecasting, industry surveys and housing-policy research. Prior to joining NAHB in 2005, Dietz worked as an economist for the Congressional Joint Committee on Taxation. He has testified before Congress on housing, economic and tax issues, and his research and commentary are commonly cited in the news media. He is a native of Dayton, Ohio, and earned a doctorate in economics from Ohio State University in 2003.
