How High Will New Home Sales Go in 2014? Very High

December 12, 2013 11:28 am0 commentsViews: 54

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Economists are looking for stronger economic growth and acceleration in job creation next year to drive demand for new homes and construction higher.

New home sales could jump more than 50% next year, according to Moody’s Analytics managing director Celia Chen. The supply of new and existing homes is tight, she says, which will prompt construction of new homes to satisfy demand.

New home sales will jump to 680,000 in 2014, from 430,000 this year, according to Moody’s Analytics’ forecast. And this will increase demand for purchase mortgages, which will be good news for lenders.

Moody’s economists estimate purchase originations will rise 25% from 2013 to $858 billion next year.

“Home sales will be strengthened and only prices will be softer next year,” Chen says. She expects the housing rebound will fuel stronger economic growth.

The chief economist for the National Association of Home Builders, David Crowe, is forecasting that new home sales will hit 607,000 in 2014, up 40% from this year.

“We are operating under an enormous amount of pent-up demand,” Crowe says. That will force buyers into the new home market.

While these forecasts may appear wildly optimistic, it should be understood that new home sales would normally be around 800,000 based on demographics.

However, tight credit conditions have made it difficult for buyers and builders to get financing. In addition, the infrastructure of the homebuilding industry fell apart following the housing bust.

Construction activity is still constrained by shortages of building supplies, developed building lots and skilled labor. “There has been terrible disruption in this industry and it takes time to put the band back together,” Crowe says. Yet he remains upbeat and expects to see some easing in credit underwriting next year.

But a 40% to 50% increase in new home sales is on the far side of most forecasts.

Economists at Wells Fargo Securities are not as optimistic. They expect to see 20% increases in new home sales and single-family starts in 2014 while existing home sales slow to a single-digit pace.

WFS’ forecast calls for new home sales to be around 530,000 units in 2014, up 23% from this year. At the same time, builders will break ground on 760,000 single-family homes in 2014, compared to 620,000 this year.

These sales and starts numbers are still low compared to historical levels. This reflects the “aftershocks of the housing bust, which have reduced buyer power and led to restrictive lending criteria,” say the WFS economists in their most recent monthly housing report. They expect builders will “discount newer homes to entice buyers into the market.”

Affordability is another hurdle for homebuyers due to the run-up in home prices this year and higher mortgage rates, which are expected to move higher in 2014.

“A lot of people don’t have the cash for a downpayment,” according to Rick Sharga, executive vice president at Auction.com. And Federal Housing Administration-insured loans are not a viable alternative for some buyers because the premiums have become so expensive.

“Affordability is a real issue for a lot of buyers today and that translates into a shortage of customers for mortgage companies,” Sharga told NMN.

The NAHB chief economist is counting on strong job creation of around 190,000 a month and rising consumer confidence to propel sales in 2014. “But we are not serving the first-time buyer like we used to,” Crowe acknowledged.

Meanwhile, several economists expect home price appreciation will slow in 2014.

The S&P Case-Shiller home price index is up 13% this year. But Scott Anderson, the chief economist at Bank of the West, expects a 2.8% increase in 2014.

A lot of potential sellers have been watching the run-up in prices and are waiting for the right time to sell their homes. “If they see that softening in home prices, I think you will see more potential sellers jump into the market,” says Anderson. “That would make for a more balanced market.”

He noted that institutional and individual investors will still be in the market in 2014. But the “bargains are gone and the inventory of foreclosed homes is very limited.” So they won’t be as aggressive in bidding up prices.

The housing recovery still has momentum despite the headwinds of affordability and tight credit. “We have been digesting the home price and interest rate increases fairly well,” the former Wells Fargo economist said in an interview. Anderson’s 2014 forecast calls for a 12% increase in new homes sales.

“The headwind of higher home prices and rising interest rates has rapidly eroded housing affordability. It will force marginal buyers out of the market and could make others settle for smaller homes or condos,” Anderson says.

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