On the House: Sifting through the predictions

If I had a nickel for every prediction of economic recovery that hasn't come to pass in the last few years, I would be able to retire at least two years before I plan to.

Still, there's always a chance that at least one or two predictions will be correct and I will be quoting a survey of Urban Land Institute members, so I'll take a chance.

The best one I have to share is that housing starts will nearly double by 2014 and home prices will begin to rise in 2013, with prices increasing by 3.5 percent in 2014.

In March, housing starts were running at an annualized rate of 654,000 units, according to the Census Bureau, which keeps track. That means if the March pace remained steady throughout 2012, construction would be started on 654,000 new houses by the end of the year.

In a normal year, according to new-home data, about 1.5 million single-family houses are started. Housing construction has lagged well below normal for five years now, and some experts believe that there will be a shortage when the market recovers.

Although new-home construction accounts for only 2.5 percent of the gross domestic product, every 100,000 housing starts account for 250,000 jobs. When jobs increase, so does the ability of people to buy houses. So one thing feeds on another, and the economy grows.

The experts' projection — a consensus view, actually — is based on a "promising" outlook for the overall economy.

The Urban Land Institute's survey of 38 leading real estate economists and analysts from across the United States, conducted in February and March, showed that real GDP is expected to rise steadily from 2.5 percent this year to 3 percent in 2013 to 3.2 percent by 2014. The unemployment rate is expected to fall to 8 percent in 2012, 7.5 percent in 2013, and 6.9 percent by 2014, while the number of jobs created is expected to rise from an expected 2 million in 2012 to 2.5 million in 2013 to 2.75 million in 2014.

The improving economy, however, will likely lead to higher inflation and interest rates, which will raise the cost of borrowing for consumers and investors. For 2012, 2013 and 2014, inflation as measured by the Consumer Price Index is expected to be 2.4 percent, 2.8 percent and 3 percent, respectively.

Ten-year Treasury rates will rise with inflation, with a rate of 2.4 percent projected for 2012, 3.1 percent for 2013 and 3.8 percent for 2014.

You all know this, I hope, but as the for-sale real estate market has been treading water, the rental-apartment sector has been, in the words of the survey report, "the investors' darling for the last two years."

That should be the case, at least for now. A slight cooling trend in the apartment sector will occur, though, as other property types are projected to gain momentum over the next two years.

For investors, total returns for institutional-quality assets this year are expected to be strongest for apartments, at 12.1 percent. By 2014, however, returns are expected to be strongest for office properties, at 10 percent, with apartments at 8.8 percent.

The institute's forecast predicts a modest increase in apartment-vacancy rates, from 5 percent this year to 5.1 percent in 2013 to 5.3 percent in 2014. There will be a corresponding decrease in rental growth rates, with rents expected to grow by 5 percent this year, then moderate to a growth rate of 4.0 percent for 2013 and 3.8 percent by 2014.

The survey suggests that 2012 could mark the beginning of a turnaround — albeit a slow one. The national average home price is expected to stop dropping this year, then rise by 2 percent in 2013 and by 3.5 percent in 2014.

Improved job prospects and strengthening consumer confidence will likely bring buyers back to the housing market.

"On the House" appears Sundays. Contact Alan J. Heavens at 215-854-2472, aheavens@phillynews.com or@alheavens at Twitter.