Patrick L. O’Toole is the former editorial director and publisher of Professional Builder, a 77-year-old publication that is read by 112,000 builders each month. Previously, O’Toole served as editor and publisher of Qualified Remodeler magazine. He started his career as a reporter for the Associated Press in Chicago. He holds a B.A. from Miami University and a masters degree in journalism from Columbia College.

Market poised for gains and obstacles in ‘14

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December 20, 2013

New projections from Freddie Mac suggest a sea-change in housing in 2014. 

For the first time since 2000, the number of new mortgages for purchasing homes will exceed the number of mortgages for refinancing. The government-sponsored mortgage giant points to continued low interest rates in 2014, a more robust economy growing 3 percent for the coming year, and a drop in the unemployment rate to under 7 percent. The result will be an estimated 1.15 million housing starts next year. At the same time, other market observers see a few persistent obstacles that will continue to exert drag on new-home sales in the year ahead. 
First, as interest rates rose slightly in the second half of ’13, new-home sales dipped more than anyone would have guessed because interest rates remain incredibly low by historic standards. Second, household formations, while much improved at a rate of nearly 1 million new households in 2013, is not putting much of a dent into the rate of homeownership, which continues to fall among every generational cohort, except those over age 50. The sales dip associated with slightly higher rates shows the overall fragility of American consumers at this stage of the economic recovery. And though many see declining homeownership rates as a positive response to sensible reforms, we need to see the bottom soon, particularly for potential first-time buyers.
At our company, we hire a lot of smart young people, many with newly engraved masters degrees in journalism from Northwestern University, one of the finest journalism schools in the country. I say this to point out that this group of 20- and 30-somethings in generations past would have been prime candidates for new starter homes. But most of the young professionals we see face student loan payments and higher down-payment requirements. Their choice of housing in the coming years is likely to have a big impact on builders as more Baby Boomers retire and move-down.
The good news is that in the long run, most individuals with college degrees will achieve financial stability and begin to purchase homes. But this raises another question: What about the growing millions of Americans who lack a good education and are stuck in low-wage jobs? Home building has always been closely correlated with job growth. But increasingly the kind of jobs we are adding are not high-paying. This fact is borne out by data from Harvard University’s Joint Center for Housing Studies’ State of the Nation’s Housing 2013 report, which shows that 40 million Americans are now moderately or severely burdened with housing costs, spending 30-to-50 percent or more of their incomes. Persistent unemployment and a relative abundance of low-paying jobs have made the once well-traveled road toward the American Dream much harder to navigate for many.
Home building will be much improved in 2014. But builders serving the starter-home market in 2014 need to actively seek ways to meet the home-buying needs and preferences of Millennials, whose numbers are greater than even the Baby Boomers. For example, will the long-term payback of owning an energy-efficient home spur them to make the leap into homeownership? Absolutely this will happen. But it is just one among many strategies that will be required to make new-home buying attractive and affordable for the next generation.

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