Thursday, October 31, 2013

Goldman's Hatzius: How Much Risk to Homebuilding?

by Bill McBride on 10/31/2013 12:59:00 PM

Goldman Sach chief economist Jan Hatzius wrote today (research note): How Much Risk to Homebuilding? A few excerpts:

The housing news has deteriorated recently across a broad set of indicators, and the FOMC accordingly downgraded its assessment of the housing market in Wednesday's post-meeting statement. How much should we worry about our forecast that residential investment will continue to grow 10-15% and directly contribute 1/2 percentage point to real GDP growth next year?

The risks to our housing forecast are on the downside in the near term, but there are three reasons why we still take a positive view beyond the next 1-2 quarters. First, there is a clearly identifiable reason for the recent weakness, namely the sharp increase in mortgage rates. Some of this increase has reversed recently, and barring another shock the impact should be mostly complete by early 2014.

Second, the fundamental supply-demand picture for housing still looks positive. If the population grows at the rates projected by the Census Bureau and the size of the average household trends sideways to slightly lower--in line with historical trends--we estimate that household formation should climb to 1-1.3 million and steady-state housing demand to 1.3-1.6 million. This implies significant upside for housing starts from the current 900,000 level once the remaining excess supply has been eliminated

Third, while home sales and starts have disappointed recently, house prices have continued to rise at double-digit rates, with few signs of deceleration. This suggests that the supply/demand balance in the housing market still looks favorable. That said, we continue to expect that home price appreciation will slow over the next year.
Clearly housing has slowed recently. This has shown up in housing starts and new home sales, and the slowdown is also evident in home builder reports. However I think this slowdown is temporary, and I expect the housing recovery to continue in 2014.

Total Housing Starts and Single Family Housing StartsClick on graph for larger image.

This graph shows single and total housing starts through August (the September and October reports will be both released on November 26th).

There has been a dip in housing starts recently, but I think starts are still closer to the bottom than the next cycle top.  I agree with Hatzius that starts will continue to increase over the next several years - and this will be a key driver for economic growth.