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Words of Optimism

Dave Hershman
Dec 19, 2013

Just as the past few years, economic growth has not been strong in 2013. Yet, for some reason, the country seems to have more optimism regarding prospects for the future. The obvious question is, “Why such optimism?” To me, it all boils down to two words—household formation. The creation of households bottomed during the most recent recession—down to below 400,000 per year from an average of 1.2 million per year over the past 65 years. This lower average was a significant drag on the economy. In the past two years, annual household growth has soared back to 1.1 million in 2011 and 2.4 million in 2012. Kids are moving out of their parents' homes in droves. Why is this increase in household formation so important? It is more than just a direct relationship between formation and the need to build homes. Even if the kids move out and rent an apartment, this increases the demand for multi-family housing, and we have seen this market recover significantly. Some will purchase or rent single-family homes. And starting a household requires the purchase of furniture, cars, insurance and more. If you look at the projections for growth in the next few years, it is no wonder that single-family home starts are expected to double from the depths of the recession by 2015. The National Association of Home Builders (NAHB) is forecasting 924,000 total housing starts in 2013, up 18 percent from 783,000 units last year. Single-family production is expected to rise 17 percent this year to 629,000 units, jump an additional 31 percent next year to 826,000 and surpass the one million mark in 2015. The cards are in play for a decent and fairly strong recovery in 2014 and particularly in 2015," said NAHB Chief Economist David Crowe. It is also no wonder that job growth is predicted to increase substantially in the next six months, according to a Federal Reserve Bank of San Francisco report. We may be in a pause now due to the effects of the government shutdown and accompanying overall economic uncertainty; however, growth spurred by household formation is inevitable. There can always be intervening variables, but the numbers are there for a solid recovery moving forward from here. Researchers at the San Francisco Fed scoured available gauges of job market health, and found six that are particularly predictive of future labor market conditions. All six, in fact, give a better signal of where the unemployment rate will be half a year down the line than the current unemployment rate itself, they said. And all six, they found, had improved since the Fed began buying bonds last September. "Across the board, these indicators show the pace of the labor market recovery has increased compared with a year ago," wrote Mary Daly, the San Francisco Fed's deputy research director, and colleagues Bart Hobijn and Benjamin Bradshaw via Reuters. "We take this as evidence that the recovery in the labor market is robust, broad-based, and likely to continue, if not accelerate, over the coming months.” Now that we are in a “lull” between budget battles and we are approaching the all-important 2013 Holiday Season, perhaps the economy will gain some momentum leading into 2014. Of course, a major factor is the season of giving. Consumers must let go a little bit from now until the end of the year. That is tougher we are experiencing the after effects of a government shutdowns Dave Hershman is a top author in the mortgage industry with seven books published, including The Complete Mortgage Management Kit. Dave is also director of branch support for McLean Mortgage. He may be reached by e-mail at [email protected] or visit
Dec 19, 2013