Builders Predict Big Jumps in Production

The National Association of Home Builders is looking for a big 26% jump in housing starts this year, followed by a nearly 50% leap in 2011 as builders begin to pull themselves out of the worst housing recession in decades. If the gains are realized, builders will erect 697,000 new units this year and 1.04 million more next year.

That’s still far below the 1.5 million units a year David Crowe, the NAHB’s chief economist, said are needed to meet the underlying demographics. But it’s a well above from the estimated 555,000 apartments and houses they put up in 2008.

“There may be a hiccup when the (homebuyer) tax credits expire” at midyear, Mr. Crowe said at the NAHB’s annual convention in Las Vegas. “But otherwise, we should see a steady pickup during the year.” The NAHB’s optimistic outlook was largely echoed by Frank Nothaft, chief economist at Freddie Mac, and David Berson, chief economist at PMI Group, parent of the PMI Mortgage Insurance Co. But their counterpart at the Portland Cement Association was not so hopeful.

“Housing will turn,” Edward Sullivan said, “but not until very late this year and nowhere near the magnitude” the mainstream economic community suggests. Noting that small business shed 2.2 million workers over the last six months and is still cutting, Mr. Sullivan said the economy won’t start generating jobs again until the second half of this year.

Citing the expiring tax credits, the huge backlog on foreclosures and continued tight lending standards, the PCA economist said the market isn’t likely to improve until the fourth quarter of 2010 and may not show real gains until the first quarter of next year.

“I’m still projecting an increase” in starts “but I’m much more modest,” he said. “There are so many hurdles out there that a full-fledged recovery won’t materialize this year.”

The NAHB’s Mr. Crowe also mentioned several negatives, or, as he called them, “not so good news.”

Among other things, we worried that unemployment is still above 8%, “which is unhealthy, and that consumer confidence in the economy is still hesitant. At the same time, however, he pointed out that the recession is over, inflation is in check, mortgage rates will remain under 6% through the rest of the year, and house prices have finally settled down to a point where they are now at 3.28 times median income, which is roughly in line with long-term stability. (At the height of the housing bubble, the price-to-income ratio had reached 4.7% nationally and 9.2% in California.)

Noting that “conditions are ripe for people to come back into the market,” Mr. Crowe predicted that it won’t be long before buyers recognize that the bottom has been reached.

He also said by the end the year, 10 states — Mississippi, Alabama, Louisiana, Texas, Oklahoma, Nebraska, New Mexico, Wyoming, North Dakota and Montana — will be back at 100% or more of normal production. At the same time, 10 others — California, Nevada, Arizona, Florida, Michigan, Ohio, Illinois, Minnesota, Vermont and Maryland — will still be below 70% of normal.

The NAHB economist said this year’s recovery will occur almost entirely in the single-family sector, where starts will rise 38%, from 443,000 last year to 610,000.

Mr. Berson also predicted that the job market will remain anemic, with small businesses, a key engine of economic growth, yet to exhibit any signs of expanding. But because of that, the PMI strategist added, it’s unlikely that the Fed with raise the federal funds rate.

The consensus among the economists was that mortgage rates are headed higher, but are unlikely to go beyond the 6% level over the next 24 months or so. “Six percent is pretty doggone good,” Mr. Crowe remarked.

Mr. Nothaft of Freddie Mac, who foresees a gradual upward drift in rates starting around midyear, is calling for new home production to reach around 775,000 units this year, while Mr. Berson is looking for a 100,000 fewer starts.