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Don't Count Housing Out in 2015

Jeremy Glaser
Robert Johnson, CFA

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. We got new housing-starts data this week, and I'm here with Bob Johnson, he's our director of economic analysis, to see what it means for the future of the housing market. Bob, thanks for joining me today.

Bob Johnson: Great to be here today.

Glaser: Let's look at this housing-starts data for October. How many new homes are being built?

Johnson: Well, we are running at just over one million units right now. And the number today was a little bit below what some people were expecting, but it's really not a bad number, and it's not very far off of trend. We've come a long way in the housing market. We were at half a million starts at the bottom of the market. And now, we're running right around one million units. That's still well below the 2.2 that we saw at the peak of the last boom. And even below the 1.5 million units that everybody kind of thinks is the standard ongoing need, based on how many households you form, how many houses get blown over or destroyed every year. That's the number that's really more normal. So, we are still a long ways from that.

Glaser: What's the split between construction in single-family homes and in multifamily? Any big differences in the trend there?

Johnson: I think that's always an interesting thing to look at. And really, if we have a million starts, probably 600,000 of them or so--round numbers--are single-family and 400,000 are apartment homes and multifamily homes. Clearly, we like to see the single-family do better; that's a bigger driver of employment and economic activity than apartments. And, there, we're not really much changed. So, the news there isn't particularly good. It isn't getting worse, but it's not accelerating dramatically either.

Glaser: So, we're seeing some pretty flat data there. When you look at permits, which are even before the starts, do you see any sign that there is some acceleration?

Johnson: Unfortunately not. Those numbers are even flatter. And by the way, I do like looking at the permits data better than the starts data. Everybody focuses on the starts. I like to look at the permits; they are much less volatile. They get revised much less. They tend to be a better predictor of the health of the market. The starts, if it gets too cold and there are two weeks when they can't lay a foundation, then you don't have a start that month. And so while the starts may be in a range of 800,000 to a million over the last year, permits might have been in a narrower band of 900,000 to a million units. So, that's why I really like looking at permits. And, there, the numbers are almost unchanged, year over year. So, there really hasn't been--in the new-home market, in any case--very much of an improvement.

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Glaser: And that's true for both single-family and multifamily?

Johnson: Exactly.

Glaser: So, are there any sign on the horizon that there could be anything getting better for housing? How do we get to that 1.5 number that might be more normal?

Johnson: This year will turn out to be not a particularly good year for new-home activity. And it's a bit of a disappointment. We made it up in some other categories that we can talk about, but [new homes] didn't do much this year. And I'm thinking next year is going to be a much better year. It may not be until the spring selling season that we see it, but here is the combination of factors that are lining up: We got the Builder Confidence Index this week, and that moved rather sharply from 54 to 58 in one month, which is kind of a big one-month move [considering that] the high of this recovery has been 59. So, that seems to indicate that they are seeing more activity and that they are feeling more optimistic, which is usually a good sign. So, I am optimistic on that front.

Rates are down or stabilized, so that had been one of the things that had been holding the market back. There is a lot of talk--we haven't seen necessarily all the action that will back it up--but we've seen some loosening in lending standards, which has been one of the things that's been holding the market back.

We've seen better employment and income data, and that tends to drive more housing activity. So, you roll all of those together, and I think we're going to have a better year for new homes next year. This year was the year of existing home and of rentals. I think next year is going to be the year of the single-family home.

Glaser: We've just been talking about new homes, then. What about the existing-homes market? What does that look like? Do you expect that to continue to be supportive?

Johnson: We've had a very good year in existing-home sales, and I think that that will probably continue. I think that new homes, because of higher labor cost and so forth, have kind of gotten a little bit priced out of the market. So, I mentioned all of those positive factors, but certainly an existing home is a little bit cheaper for the same amount of square footage. So, I would think that existing homes will continue to do well as people see these giant increases in rent and try to find a way around them--and certainly, one of those ways is buying an existing home. And I hope to see more of that in the next year.

Glaser: Then, what about remodeling, things like that, which also go into that housing GDP calculation?

Johnson: The housing GDP number has gone up from, at the bottom, about 2.5% to just over 3%, and it typically averages around 5%. So, again, we've still got a lot of runway room on that one. And as I've said, in this recovery we've kind of shifted it around a little bit. The commissions on existing homes have been a bigger contributor to that number than in the past. And certainly, remodeling is beginning to act a little better again, and that certainly helped the number a little bit after holding it back awhile. Nobody wanted to invest in a home that was under water.

Now, some of that remodeling business is coming back, and we saw that in some of the results from Home Depot (HD) and Lowe's (LOW) this week--whose underlying fundamental businesses were both relatively strong. Certainly, one of them had an issue with a data breach, and that created its own set of problems. But in general, I think they speak well to the remodeling market, which may be a bigger contributor than it's been in the past.

Glaser: So overall, what's your expectation for housing over the next, say, year or two?

Johnson: I think that we are going to see some improvement. I think this year was a big disappointment. And luckily, there were a lot of other things in the economy that kind of kicked up and made up for the softness in housing--which was still up, just not as much as everybody thought. I think now that everybody has kind of written off housing that, actually, 2015 might be the year where housing kicks in in a much bigger way than it did in 2014.

Glaser: Bob, thanks for your thoughts today.

Johnson: Thank you.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.