Recovery do-over

On the surface, the housing market is in the same place it was a year ago, sitting on pent-up demand and piles of frustration, poised for recovery to begin. Projections for housing market performance in 2012 are similar to those of a year ago. Modest improvements are expected in this market that has remained stable and solid — at the bottom of historical numbers — for more than a year.

Results of our sixth annual Market Trends Survey support the notion that stability — albeit at a low level — has settled across the market. A mere 6 percent of respondents plan layoffs this year, and the majority of survey respondents plan to keep their staff levels the same (see chart directly below). Across the board, these numbers and many others from our survey are similar to those of a year ago. More than two-thirds of respondents (68 percent) report an excellent, good or fair outlook on the custom home market in 2012. For more results of Residential Design + Build’s 2012 Market Trends Survey view the charts within this article, and the list of takeaways to the right on this page.

Residential Design + Build spoke to two housing economists about expectations for this year, and other observations beyond our survey results, and both remain cautiously optimistic as they were a year ago. “We are expecting for 2012 a total of 685,000 starts,” says David Crowe, chief economist, National Association of Home Builders. “That’s a 15 percent improvement over 2011. I’d say it’s a modest increase, but it’s a better increase than we’ve seen in this cycle. It’s a good percentage as we’ve unfortunately been hanging around in the high 500s for three straight years. At 685,000 starts we’d be just a bit over one-third of the way to what should be a normal year of 1.8 million.”

Modest is the operative word, says Kermit Baker, senior research fellow, Harvard University’s Joint Center for Housing Studies. “We are sensing that we will see modest improvement in 2012. We ended 2011 with almost 600,000 starts and I think the numbers we’re seeing for 2012 are around 650 to 700,000. That’s an increase of more than 10 percent.”

The American Institute of Architects’ third-quarter 2011 Home Design Trends report indicates a positive shift in custom home market conditions. More architects reported weakening than positive conditions, but far fewer have a negative outlook than in the previous quarter. NAHB’s Crowe adds, “What we’ve noticed is there’s still some solid demand for custom homes where the buyer is contracting with a specific builder for a specific product. I sense that component of the market, while small, are customers that have financing and are taking advantage of good prices. They are there and are people who are smart enough with deep-enough pockets who are taking advantage of situation. But it’s not a large number.”

Further improvement can be seen in the world of lending. “It’s a big problem but it’s getting better moving forward, not worse,” Harvard’s Baker says. “Two years ago banks were telling people, ‘We don’t make loans in the residential sector anymore.’ That approach is dissipating and the pendulum has swung back toward underwriting as folks are getting back in this market.”

Challenges remain, however. “The top issue builders tell us is the lack of loanable funds for ADC [Acquisition, Development and Construction] financing,” Crowe explains. “That has been a significant issue for two years, since the collapse of the financial system. We’ve been doing quarterly surveys and it’s always the same answer, that banks are unwilling to lend to builders, sometimes even when they have a signed sales contract. That’s a signal that building is being done at the owner’s desire.”

The brightest spot in the housing market continues to be the remodeling sector, a trend that will continue in 2012. Builders and architecture firms will continue to gravitate toward this segment, as seen in the results of our survey. Half of respondents (49 percent) report doing more remodeling work in 2011 than in 2010, and almost half (45 percent) tell us they’ll do even more remodeling this year.

“Single-family builders moved into remodeling to keep their doors open,” Crowe says. “As the new construction market comes back, I suspect they’ll switch back to new construction. But I think the demand for remodeling will stay strong for a few reasons. Many homeowners will remain in place and remodel instead of changing addresses. The second reason is there are a lot of foreclosed homes that need refurbishing before being put back on the market. I think those two underlying trends won’t stop soon.”

The rental market is one that also gains steam as those poised to form households can’t afford to buy a home, can’t get a mortgage or simply don’t want to buy. The multifamily sector outperformed the single-family sector in 2011, which is expected to continue for many years, Crowe says. “Young people forming their first households will be more likely than ever to be renters. It’s a harder road for them because of a lack of employment opportunities, and savings which will be more important for down payments. People remain nervous about owning. Surveys say this is a temporary situation because people still want to own a home at some point. It’s out of necessity they will become renters, not desire.”

If housing production bounces back higher than anticipated, it could create a backlog in the supply of building materials. Baker says starting up a manufacturing plant or sawmill doesn’t happen at the snap of the fingers. “The sentiment about the market is flat to up-sloping, but not everyone can turn it on as quickly as builders and designers can. That could be an issue. For those who have mothballed plants or shut them down, it could take a while to bring them back,” Baker says.

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