Since the Great Recession, investment in the U.S. residential housing sector has followed a slow road to recovery from the peak of 6.7% of GDP that it reached in early 2006, according to a new Wells Fargo report. The apartment sector has led the overall industry’s recovery to the 3.8% of GDP level it enjoys now, while single-family homebuilding continues to lag. A variety of factors—from slower population growth to people’s reduced mobility to the Millennial generation’s decision to delay new household formation—are at play in the decline.
Still, Wells analysts believe there are signs the recovery will stay on track over the near term, starting with household formation. As the older edge of the Millennial cohort approaches 35, “Growth in household formations should ramp back up to 1 million net new households this year and 1.1 million new households in 2018,” said Mark Vitner, senior economist, and Misa Batcheller, economic analyst—both with Wells. Add in demand for replacement and second homes, the overall housing demand should reach close to 1.28 million this year and 1.38 million in 2018, though new home construction is expected to lag and home prices should continue to rise at a greater rate than inflation.
“We have slightly increased our forecast for new home sales and housing starts for 2017 and 2018 based on the expectations that the Trump administration will succeed in cutting income tax rates and also ease some regulatory burdens for builders, developers, lenders and home buyers,” the analysts said.
Still, this impact will be moderated by the expectation that such changes will take time to accomplish. Thus Wells sees new home sales rising by 10.1% this year and 9.7% in 2018, with single-family starts rising at a similar level, though home price appreciation is likely to decline as builders focus on lower-cost suburban areas and in states with lower housing costs, such as Texas, Florida, Georgia and the Carolinas.
Look for more coverage of the U.S. construction sector outlook in this week’s NACM eNews.
– Nicholas Stern, editorial associate