2004 Housing Market Looks Great.
12/19/2003
Written By RISMEDIA

Nation's Housing Market Poised For Solid Showing In 2004

RISMEDIA, Dec. 19-Coming off one of the housing market’s best years in history in 2003, the nation’s home builders expect to stay nearly as busy next year as rock-solid market fundamentals continue to bolster demand for new homes and apartments nationwide.

"Based on our expectations for mortgage rates, house-price performance, household formations and overall economic conditions, we’re very optimistic that demand for new homes and apartments will settle at a slightly lower, but still-robust level in the new year," said Kent Conine, president of the National Association of Home Builders (NAHB) and a home and apartment builder from Dallas.

"With most - but not all - of the data in for 2003, it’s obvious that this has been a record-breaking year for the single-family market and for homeownership in the U.S.," said NAHB Chief Economist David Seiders. "Not only will new-home sales break the million-unit mark for the first time on record, but it’s now apparent that total production of new single-family homes (including homes built on owners’ lots) will hit its highest level in history in 2003, at about 1.5 million units. Moreover, evolving market fundamentals -- including a modestly higher interest rate structure, stronger job and income growth, and maintenance of strong demographic foundations (bolstered by robust immigration) -- will keep single-family market activity at an elevated level in 2004."

Sales of new single-family homes should once again eclipse one million units next year, NAHB predicts. On the production side, starts of single-family units should recede by only about 3.5 percent to 1.45 million units. In the multifamily sector, a strong condo component and solid production of federally subsidized low-income rental housing will continue to provide essential support to the market while better job growth will help combat high vacancies in market-rate rental housing. As a result, NAHB projects a mere 1.5 percent decline in multifamily production to 342,000 units this year, followed by some further softening in 2004 to 327,000 units.

"Remodeling of existing housing -- primarily improvements to owner-occupied homes -- will also continue to be a major factor in terms of housing-related spending in this economy," Seiders said. "We’re projecting about $182 billion of residential remodeling activity in 2003 and $192 billion in 2004."

Production of manufactured homes (HUD-code units) has been the weakest component of the nation’s housing market in 2003, but this market apparently stabilized around mid-year. NAHB is estimating shipments of 132,000 units in 2003, followed by slow recovery to 145,000 units in 2004 -- still only about two-fifths of the peak rate in the late 1990s. Total production of new housing units (conventionally built units plus manufactured homes) will be around 1.92 million units in 2004, down from an estimated 1.97 million this year.

Overall, housing production should proceed at a strong and relatively stable pace next year, providing firm support to the economy but not continuing to serve as a major growth engine in the GDP accounts, Seiders noted. "In turn, we expect the nonresidential business sector to assume a stronger role in the evolving economic expansion," he said. NAHB expects the housing production component of Gross Domestic Product - residential fixed investment - to expand only slightly next year following a roughly 10 percent gain in 2003.

A central factor in the housing outlook is a favorable financing climate, which will continue to buoy home sales, remodeling activity and apartment building. NAHB expects the average rate on long-term home mortgages to remain under 7 percent throughout 2004, climbing only gradually from the current 5.9 percent range to about 6.6 percent by year-end. The cost of adjustable-rate home loans should stay historically low, largely reflecting maintenance of a 1 percent federal funds rate by the Federal Reserve for most of the year.

Strong house-price performance will also continue to emphasize the investment potential of homeownership in the new year. Nationwide, home prices appreciated by about 6.5 percent during the first three quarters of 2003 (on a year-over-year basis), and it’s likely that price appreciation will be in the 5-to-6 percent range in 2004. It is worth noting that, in most cases, the home is a family’s single largest investment. The household sector has about 30 percent of its assets in homes and Americans have more than $7 trillion in home equity - a figure that is bound to grow further in 2004.

Solid demographics are also expected to bolster demand for new homes and apartments throughout next year and beyond. "Net household formations apparently have been running at about 1.4 million per year in recent times and should continue around that pace next year," Seiders said. A major component of that is immigration, which appears to be running around 1.5 million people per year. Seiders also noted that recent population growth has been trending above Census Bureau "middle series" projections made in 2000, and that pattern is likely to continue in 2004.

With respect to complications for builders, Seiders said that restrictive zoning and no-growth or slow-growth ordinances can be expected to further restrict supplies of available lots for development in many metro markets next year, driving up land prices and the overall cost of homes. "In some high-growth markets, the cost of a developed lot - raw land and improvements plus fees for basic infrastructure such as schools, roads, and sewer systems - now accounts for as much as 30 percent of the new-home price," he explained.

Based on interviews with builders and architects, NAHB is also projecting a number of design trends in new homes over the coming year. For example:

The average size of newly built homes has stabilized at 2,320 square feet over the last three years and is expected to remain in this range in the coming years.

More than half of all newly built homes will have 9-foot or higher ceilings, which are increasingly becoming a standard feature in the average home.

The median lot size will continue to decline as growth controls cause inventories of buildable land to shrink and land costs to rise. On the flip side of the coin, large-lot/slow-growth zoning ordinances in certain jurisdictions continue to mandate one-or-more-acre lots for some homes.

There will be a heightened emphasis on special features such as high-end appliances, low-maintenance finishes and above-grade materials.

Nowhere will this emphasis be more apparent than in kitchens and bathrooms. Buyers of new homes are demanding large kitchens that are adjacent to family rooms, with the two rooms being visually open or divided by a half wall. Bathrooms are also getting larger and are increasingly being built with upgraded fixtures and lighting, plus linen closets, double vanities and separate toilet compartments.
Living rooms are shrinking or disappearing altogether. More than one-third of homes built last year did not have a living room, and this trend is expected to continue.

Most new homes will come complete with a separate laundry room, which most buyers identify as a top priority. Other popular specialty rooms, including exercise rooms, home offices and media rooms, will remain primarily the domain of upscale homes. However, many mid-range homes will have multi-purpose space such as an extra bedroom devoted to these pursuits.

Homes with structured wiring systems (also known as "CAT 5") that allow for faster data transfer rates will continue to gain in popularity. Three-quarters of home builders offered structured wiring in their homes last year, and more than 40 percent of homes built in 2002 had this feature.

High-technology features, including monitored security, distributed audio and home theater systems, and to a lesser extent, automated lighting and energy-management systems, are now very much available in the upscale marketplace. Looking forward, these can be expected to gradually percolate down to the general market, just as other features such as fireplaces, 9-ft. ceilings and 3-car garages have done over the years.

More communities in the coming year will be built with recreational facilities, including walking/jogging trails for adults, play areas for children, and/or a fitness center.

Expect to see more ceiling fans in newly built homes. Close to 80 percent of respondents in a recent NAHB survey of consumer preferences tapped ceiling fans as desirable or essential features in a new home, indicating a significantly greater emphasis on these than in the past.

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