Positive economic and housing data ended 2017 on a high note. While the newly enacted tax reform bill offers a complicated set of impacts, the underlying trends for the sector are positive given solid macroeconomic fundamentals and tight existing home inventory. In fact, NAHB has upgraded its GDP forecast for 2018 to a 2.6% growth rate, in part due to the broader set of economic benefits that the new tax law will yield.
These positive conditions are clearly reflected in the current reading of single-family home builder confidence, the monthly NAHB/Wells Fargo Housing Market Index (HMI). The HMI registered a level of 74 in December, the highest reading of builder sentiment since 1999. Particularly encouraging was the measure of prospective buyer traffic, which came in at a level of 58. Higher traffic is welcome, if not surprising, given a robust job market, with an unemployment rate at 4.1%, and a lack of available existing homes for sale.
The traffic reading was confirmed by the November estimate of new, single-family home sales. Sales increased 17.5% in November to a 733,000 seasonally adjusted annual rate according to the Census data and are set to end the year more than 9% higher than the 2016 total. New-home inventory remains low as well, with only 64,000 homes for sale that are completed and ready to occupy. In fact, the most recent reading of new-home inventory conditions reveals that there has been year-over-year growth of 65% of homes sold that have not begun construction. And months’ supply of all new homes is only 4.6.
These inventory numbers point to additional gains in home construction. The most recent housing starts data indicate that single-family starts will post an almost 9% growth rate for 2017, while multifamily starts were down, albeit to an elevated production level of 360,000 units for the year. The gains for housing construction have been found in many submarkets, notably for smaller homes as the entry-level remains starved for inventory.
For 2018, NAHB expects continued growth for home construction and remodeling. The home improvement sector should remain strong given recent home price gains and increases in homeowner wealth, and reduced levels of household moves means more of a need for aging in place and other lifestyle improvements.
For multifamily development, we expect a slight decline from 2017 construction levels as the market finds a balance between supply and demand. Rent growth is slowing and vacancy rates are rising in many rental markets. On the positive side, the recently enacted tax legislation maintained important policies supporting affordable housing development, including the Low-Income Housing Tax Credit and the tax-exempt private activity bond program.
For single-family construction, NAHB forecasts continued growth, albeit with some areas of price and sales weakness due to changes introduced in tax reform, particularly in high-tax metro areas constrained by new limits on state and local tax deductions. Nonetheless, NAHB expects a 5% pickup in single-family starts. The risks to the forecast remain ongoing increases in interest rates, rising building material prices, and ongoing regulatory burdens and delays. It is on this last point that advocacy efforts can make real progress with smart policy that would increase housing supply and reduce housing affordability challenges.
