David Crowe delivers State of the Economy address at PDIS
Colorado Springs -- A good portion of the ProDealer Industry Summit crowd stuck around until Friday morning to hear David Crowe's thoughts on the broader economic picture for the industry.
Crowe -- the chief economist and senior VP of the National Association of Home Builders (NAHB) -- explained why this recession was different than all the past ones.
"If you've grown up in the housing industry, you know the phrase 'housing leads us out of a recession,'" he said. "That didn't happen this time, and the main reason this didn't happen was because housing was a big part of the reason behind the collapse, and there were still a lot of vacant houses and people out of work. Now, the housing industry is dependent on the rest of the economy."
Crowe emphasized employment's role as the real key to the recovery: the good news, he said, is that we're now employing more people than ever before. Currently, there are 142 million people working in the U.S., up from the pre-recession peak of 138 million. However, that number is still below trend growth, and a low labor participation rate undermines an encouraging national unemployment rate. What's more, a lot of the jobs created in recent years aren't necessarily high in quality, and a multitude of low-paying service jobs is employing people who are more likely to be renters.
Additionally, Crowe demonstrated that employment is roughly correlated to single-family permit change, underscoring the relationship between employment and housing.
Here are some of the other factors Crowe thinks are currently affecting the housing market:
Young people are delaying everything, as many are accustomed to hearing. It's also no secret that there's a strong correlation between marriage and homeownership.
Though consumers seem to be hesitant about housing, the same is not true for other big purchases. Automobiles and furniture are doing extremely well, indicating "a willingness to spend money on things you could postpone." This checks out with consumer confidence, which is nearing its pre-recession peak. "There's no good reason why we've had this muddled feeling, why people still feel like there's this cloud ahead of them," said Crowe.
Homeowner equity is increasing thanks to rising home prices: $12 trillion, and continuing to rise. At the same time, it's also contributing to a class of people who have no equity, so they can't sell or move forward.
New home sales are on the up and up. There was a stronger rise in the number of new home sales in 2015 versus 2013: 25% verus 4%. At the same time, there are a lot of existing home owners who are not ready to sell or buy, and that keeps the market from moving, because demand in the new home market is mostly dependent on existing home owners.
Concerns among builders have shifted dramatically between 2011 and 2014. The biggest concern is currently regulation of banking institutions, though that's dropped from 77% to 62%. Builders are much more worried about cost/availability of labor (from 13% to 61%) and cost/availability of development lots (21% to 55%). Also of concern is building material prices (from 33% to 58%). Concern over the employment and economic situation has dropped from 79% to 51%.
Real GDP growth has slowed in 2015, but is gearing up for a rebound in '16 or '17: that's 2.4% in 2014 and 2.6% in 2015, compared to 3.0% and 2.7% projected for 2016 and 2017, respectively. "Part of the reason behind the slow growth is slow growth -- and irregular growth," said Crowe. Meaning if the economy isn't growing, employers aren't hiring as many people, which just compounds the effect.
Mortgage rates are almost definitely expected to rise over the near-term: from 4.2% and 3.9% in 2014 and 2015 to 4.5% and 5.5% in 2016 and 2017, respectively.
Builder sentiment and new home sales have proven to correlate in the past, with sentiment being reasonably predictive of sales. This indicates that we should continue to enjoy good home sales.
Crowe's prediction for starts: this year, we'll likely end up at 719,000 single-family starts, then 914,000 in 2016 and 1,140,000 in 2017. That's still far below "normal market" from 2000-2003, which was 1,343,000 single-family starts.
The U.S. can expect more of a piecemeal recovery, with some states (like Texas and North Dakota) already back to their norm, and other states (like those with manufacturing economies in the Midwest) having a much longer road to travel back to health.
On economists: "We're pretty much just like accountants, but without the personality," said Crowe.