I’ve followed baseball and housing statistics for a long time, and I’ve come to realize that they have something important in common. (Yes, baseball statistics can be important, albeit less important to our economic well-being than housing statistics.) What I’ve learned is that with both, over the long run, everything returns to the mean. That’s to say things average out over time; they return to “normal,” if you will.
In baseball that means that while a long-time .300 hitter might endure an 0-10 slump over two to three games in the course of a 162-game season, he’ll get his hits and end up batting around .300. On the flip side, a lifetime .250 hitter whose batting average stands at .325 in mid-May is going to go hitless in a lot of games for the rest of the season.
In housing, getting back to normal means that if annual housing starts have averaged around 1.45 million for 50 years, which they have, they can neither stay at 2 million for long nor can they stay at less than 1 million for very long.
Knowing this allows me to answer, with confidence, a question that comes up at every meeting I attend that includes builders and building product manufacturers: How much longer will the housing recovery last? My answer: for a few more years at least.
That’s the correct answer, I think, because even though we’re into the seventh year of this housing recovery, housing starts this year will reach only about 1.2 million units, which is well short of the 50-year average of 1.45 million. Moreover, in no previous housing recovery—and there have been six of them since 1960—did housing starts peak at 1.45 million units and then begin to decline. During all of the previous recoveries, housing starts peaked around 2 million units, which suggests that this recovery could still have a long way to go.
If you’re still not convinced that housing starts won’t collapse sooner as opposed to later, then let me introduce you to Mark Boud, chief economist of Metrostudy, Hanley Wood’s housing data and information business. He’s a serious student of housing, and he’s recently released his 2017 housing market outlook. He’s decidedly optimistic about housing through at least the end of 2018, and he gives the following reasons why:
- Since 2009, annual housing starts have averaged around only 900,000 units, about 33% below the long-term average. He sees this creating a housing supply shortfall of close to 3 million units by the end of 2018.
- On the other hand, he sees demand increasing. When demand outstrips supply, prices usually rise, but Boud believes housing prices will remain undervalued for two more years. (In fact, Boud believes housing demand will exceed housing supply for 5 more years.)
- He predicts a solid economy will create 2.54 million jobs next year. This is important because job growth boosts consumer confidence, and consumer confidence in turn boosts home sales.
- Solid increases in consumer spending, the biggest driver of overall economic growth, will continue through 2017.
- Yes, he assumes, mortgage rates will rise—finally—next year, but he also assumes household incomes will rise—finally—as well. The net effect: a wash.
Boud forecasts that housing starts will reach 1.27 million in 2017, up about 8% versus this year, and then increase another 7% to 1.36 million in 2018. That’s not bad, but it’s still short of housing’s long-term average. So, who knows, maybe housing’s winning streak will extend into 2019.
P. S. For you remodelers out there, Boud has happy news as well. This year remodeling activity has already surpassed, by about 5%, the previous peak in 2006, and he expects another 3% to 4% uptick in 2017.
