Sunday, February 19, 2017

Millennials Jumping Into Market as Boomers Retire and Sell

Last month, I wrote about how improvements in the housing market will be different depending on geographic regions of the U.S. This month, I wanted to review how this gradual improvement will also differ based on demographics and generational shifts.

For all of 2016, the share of first-time buyers rebounded to 35 percent – a three-point improvement over 2015 levels -- as well as a positive rebound for this cohort’s historical 40-percent share of the market. 

Obviously, encouraging first-time buyers to grab that first rung of the housing ladder is important, as they can then roll future equity gains into move-up homes, vacation homes and eventually senior housing, which continued to account for 14 percent of sales.

The typical buyer in 2016 was 44 years old, a figure which has remained flat for three years, but the median household income rose again to $88,500. Two-thirds of these buyers were married couples, followed distantly by single women (17 percent), unmarried couples (8 percent) and single men (7 percent).

So what kind of homes did they buy?

Just 17 percent of new homes sold in 2016 were priced under $200,000, for a drop of two percentage points from 2015. A larger drop of three percentage points was noted for new homes priced from $200,000 to $300,000 (32 to 29 percent), while new homes priced from $300,000 to $500,000 increased their share from 33 to 38 percent, lending additional proof that the ‘sweet spot’ for home builders is in this first- and second-time move-up market. Meanwhile, the share of more discretionary homes priced over $500,000 remained stable at 16 percent between the two years.

Looking at just December of 2016, the distribution of sales for new homes moved even further in the same direction, with those priced from $200,000 to $500,000 accounting for more than two-thirds of the total, while the share of entry-level units priced under $200,000 eroded further to 14 percent.

Meanwhile, the existing home market – which the NAR says accounted for 86 percent of all home sales in 2016 – seems to remain the favored option for entry-level buyers. During December of 2016, more than four of every ten existing home sales were priced from $100,000 to $250,000, with another 13 percent priced under $100,000. While there is certainly a robust move-up market for existing homes – with 32 percent of December’s sales priced from $250,000 to $500,000 – when existing homeowners are looking to trade in their starter home for something larger or in a better area, about one-third focus on the advantages of new construction.

Looking ahead to the longer term, two primary demographic trends will continue to drive housing demand.

The first is an aging population, with the number of adults aged 70 and over rising by over 90 percent over the next two decades. The challenge here is ensuring a reliable supply of affordable, accessible housing which can also provide the types of supportive and social services needed as the huge Baby Boom generation continues to retire at the rate of 10,000 per day.

The second main trend is the increasing share of the minority population among the 86-million strong Millennial generation, which is already at 45 percent – a bit higher than the 40 percent share among Generation X and significantly more than the 28 percent share among Baby Boomers.

While it is certainly true that Millennials have been postponing starting their own families and buying their own homes, the five-point increase in 2016’s share of homes bought by first-time buyers would indicate this is starting to change. In fact, over the next two decades, this cohort will increase the population of those aged 30 to 49 years by 17 percent.

However, what will be different this time are the types of homes demanded by the significantly larger minority populations versus previous generations.

Although just 11 percent of the homes sold in 2016 were to multi-generational households, this is expected to increase due both to average larger family sizes among minority groups as well as multiple income streams to finance these purchases with traditional mortgage products.

For home sellers – who typically had lived in their homes for 10 years in 2016 – builders of new homes have a unique opportunity to capture their interest, especially since the most-cited reasons include a too-small home (18 percent), a desire to move closer to family and friends (15 percent) or a job relocation (14 percent).With a median net gain of over $43,000, that figure certainly makes a robust down payment for the next purchase.

Thursday, January 19, 2017

The Housing Market in 2017: Not all Regions are Created Equal

Although all signs continue to point to a positive year ahead for the national housing market, that doesn’t mean the gains and opportunities will be evenly shared.  As in years past, it will likely be the South and West regions out-performing against the Northeast and Midwest.

Looking first at where the jobs are, however, it was in the Midwest and the Northeast where the unemployment rate was the lowest in late 2016, with the highest rate noted in the West and the South.  Yet it was in the South where most of the private sector job growth occurred (42 percent), followed somewhat distantly by the West (29 percent). Although the Midwest and the Northeast may have lower overall unemployment rates, their capture of job growth ranged from just 12 to 15 percent.

Another snapshot of the employment picture is planned job cuts at the end of 2016, with the Northeast and the South together accounting for nearly two-thirds of the total; the fewest planned job cuts would take place in the West and the Midwest.  In other words, it’s possible that unemployment rates in the Northeast and South will inch back up in the months ahead.

In terms of new single-family home sales through the first eleven months of 2016, nearly 60 percent were sold in the bustling South region, followed distantly by the West, the Midwest and the Northeast. Yet it was the Northeast which saw the greatest year-on-year sales increase of 34 percent – double that of the Midwest and roughly three times the rate of the South and West.

In terms of market balance, while the share of unsold homes in the Northeast indicates more excess supply, in the South demand continues to run slightly ahead of supply.  Not surprisingly, builder confidence remained strongest in the West and South in the first month of 2017, yet was also almost as positive in the Midwest, and lowest in the Northeast.

As it did for new homes, the South region also dominated the share of existing home sales through most of 2016, with over 40 percent of the total, or nearly the combined share of both the Midwest and the West.  Yet, it was again the Northeast which noted the largest year-on-year sales increase of five percent – a point higher than in the Midwest and more than double the rate of the South and West. Nonetheless, for pending sales the South continues to outperform both the nation and the other regions, and it also posted the highest rental vacancy rate in the third quarter of 2016.  In the housing-crunched West, vacancy rates were just 4.4 percent.

Looking ahead to the rest of 2017 based on building permits and housing starts in 2016, the South will likely continue to capture 40 to 50 percent of both single- and multi-family construction, with another 25 to 30 percent reported in the West.  Of the remainder, about 15 percent will be built in the Midwest, and 10 to 15 percent in the Northeast.  Similar numbers were also noted for completions throughout 2016.

As a final caveat, however, past is not prologue, especially with a new Presidential administration likely to impact the housing market in various ways.  These changes could include higher mortgage interest rates due to increasing inflation and housing finance reform as well as worsening labor shortages related to more stringent immigration enforcement.  However, we could also see increased demand due to lower income taxes and fewer regulations.

If nothing else, 2017 should be quite interesting.

Friday, January 13, 2017

January column for Builder & Developer now posted online


My column for the January 2017 issue of Builder and Developer magazine is now posted online.

For this issue, entitled "A Look Ahead to 2017:  Higher Interest Rates and Tight Inventory," I discussed what we might expect for the housing market with a new Presidential administration.

An excerpt:

For 2017, the International Monetary Fund (IMF) is projecting global growth of 3.4 percent (2.2 percent for the U.S.) versus 3.1 percent in 2016 (1.6 percent for the U.S.), with this higher growth rate attributed mostly due to greater stabilization for energy and commodity prices as well as continued low interest rates.

However, the same forecast is also mindful of the potential economic fallout from political instability not just here at home, but also across Western and Eastern Europe, the Middle East as well as parts of Asia and South America. So what does that mean for a Trump Administration? It depends a lot on whether or not the new President takes his own campaign promises seriously or literally...

To read the entire column, click here.

To read the entire January 2017 issue in digital format, click here.

Tuesday, December 20, 2016

December column for Builder & Developer now posted online


My column for the December 2016 issue of Builder and Developer magazine is now posted online.

For this issue, entitled "2016 in Review:  Continued Recovery from The Great Recession," I reviewed the current state of the U.S. economy and what we can expect in 2017.

An excerpt:

U.S. GDP—which had hovered closer to 1.0 percent during the previous three quarters—surged to 2.9 percent in the third quarter, due mostly to rising inventory of goods, higher exports, and more federal government spending.


Job growth, which rose by 161,000 in October, has averaged 181,000 per month throughout 2016. Although this is down 21 percent from 2015’s average level, it is still more than enough to keep up with population growth and continue putting downward pressure on the official unemployment rate.

To read the entire column, click here.

To read the entire December 2016 issue in digital format, click here.

Friday, December 16, 2016

A Look Ahead to 2017: Higher Interest Rates and Tight Housing Inventory


As recently as early November, most economists were working on their forecasts assuming things would remain much the same under a Clinton Administration. However, given the stunning Electoral College victory of Donald J. Trump – perhaps the world’s most famous builder and developer – most of those prognostications are now simply their best guesses.  Indeed, political uncertainty has emerged as the most important externality impacting not just the U.S. economy, but that of the world as well.

For 2017, the International Monetary Fund (IMF) is projecting global growth of 3.4 percent (2.2 percent for the U.S.) versus 3.1 percent in 2016 (1.6 percent for the U.S.), with this higher growth rate attributed mostly due to greater stabilization for energy and commodity prices as well as continued low interest rates.

However, the same forecast is also mindful of the potential economic fallout from political instability not just here at home, but also across Western and Eastern Europe, the Middle East as well as parts of Asia and South America.

So what does that mean for a Trump Administration?

It depends a lot whether or not the new President takes his own campaign promises seriously or literally.

In 2017, the general prognosis is for another good year for the housing market, which will also continue to be hamstrung by affordability pressures, high costs for finished lots, and a shortage of construction labor.

Given that 25 percent of construction jobs are held by foreign-born workers, stricter immigration policies could worsen this problem. Much of this impact could hit the types of starter homes demanded by Millennial buyers, who are expected to make up about one-third of the overall market.

In addition, Mr. Trump’s planned fiscal stimulus plans are already being baked into the financial markets cake, with interest rates for conforming, 30-year fixed rate mortgage rates rising by over 40 basis points within one month after November’s election. While that may require buyers to lower their sights on a certain price range, overall access to mortgage financing is expected to improve as both Fannie Mae and Freddie Mac increase the price of the homes they’ll back, while larger financial institutions have re-introduced mortgages with as little as one to three percent down.

Should Trump reverse the lending regulations required by Dodd-Frank, we would also expect to see the lending spigot open further, as the onus for foreclosed mortgages returns to the buyers versus the lenders who made them. Moreover, as interest rates rise and the percentage of refinancing drops, lenders will be more interested in making up that shortfall with more purchase loans.

The year 2017 should also be the start of an important demographic change, in which more higher-income Baby Boomers are retiring than can be replaced by younger Millennials moving into the workforce. We’ll start to see the impact of this over the next five to ten years, mostly in the form of more Millennials forming new households and buying that first starter home, many of which could be in more affordable, second-tier suburbs or cities.

However, given that demand for new homes may continue to exceed supply for several more years, that imbalance could continue to push prices up, thus exacerbating affordability constraints when also taking into consideration higher interest rates.

New home production will also remain tight by historical terms, as any favorable changes in national policy will take time to reach the construction site. Even though the national Leading Markets Index has returned to 98 percent of normal, new home production remains stubbornly low at about 60 percent of historical norms. While new home inventory did rise by just over nine percent between October of 2015 and 2016, the inventory timeline still shrunk from 5.6 to 5.2 months.

For now, builders are responding to affordability issues by building smaller single-family homes when possible, with the median size falling by over 1.5 percent to 2402 square feet between the third quarters of 2015 and 2016. At the same time, the median size for multi-family homes rose by five percent to 1092 square feet, as higher-quality townhomes, condominiums and apartments offer an acceptable single-family home substitute for entry-level buyers.

Finally, today’s greater aversion to risk may also impact the move-up market, especially if potential buyers with mortgage rates under four percent choose to stay in place by remodeling instead of leaping up to that next rung on the housing ladder.  In that case, higher interest rates may trump – pun intended – other factors.

Here’s to a happy and successful 2017!

Friday, November 18, 2016

2016 in Review: Continued Recovery from The Great Recession

At this same time a year ago, I wrote about a housing rebound that had continued its slow yet gradual climb back to normal.  The good news has continued in 2016, so much so that it’s widely expected for the Federal Reserve to hike its benchmark interest rate by the end of the year.

U.S. GDP -- which had hovered closer to 1.0 percent during the previous three quarters ---- surged to 2.9 percent in the third quarter, due mostly to rising inventory of goods, higher exports, and more federal government spending.

Job growth, which rose by 161,000 in October, has averaged 181,000 per month throughout 2016. Although this is down 21 percent from 2015’s average level, it is still more than enough to keep up with population growth and continue putting downward pressure on the official unemployment rate.

Nonetheless, there is an important caveat here to consider: Although a 4.9 percent unemployment rate implies that the economy is more or less at full employment, by also including discouraged workers, the under-employed and those persons marginally attached to the workforce, the unofficial unemployment rate rises to 9.5 percent – or exactly matching what it was in October 2015.

This higher unemployment rate is also why wages had been stubbornly flat during this long economic recovery, although over the last 12 months they did rise by 2.8 percent, thus giving workers a slight edge over inflation.

Speaking of inflation, after years of it remaining flat or even dipping into deflationary territory, it’s now returning, which is why higher interest rates are on the short-term horizon.  For the 12-month period ending in October, the Consumer Price Index rose 1.6 percent, and by 2.1 percent when subtracting out more volatile indices for energy and food.  Even the supply-side Producer Price Index rose by 1.6 percent during the same time period, which is a big jump from a year ago, when it was less than 0.5 percent per year.

Confidence is trending higher, with the University of Michigan’s Consumer Sentiment Survey edging up to 91.6 in its preliminary November reading – up 5.0 percent from October and 0.3 percent from a year ago. At the same time, builder confidence has remained at well over 60 for three consecutive months (anything over 50 is positive), and is approaching 70 for single-family home sales now as well as over the next six months.

Supporting this confidence was a surge in housing starts in October to a nine-year high, up by over 25 percent from the previous month and over 23 percent year-over-year to an annual rate of 1.3 million. Although October building permits rose by much smaller amounts, the annual rate of 1.2 million demonstrates that the strength in starts is likely to continue.

Still, given tight levels of supply in most markets, affordability remains a concern, with 61.4 percent of families earning the median income able to afford the median-priced home at prevailing interest rates in the third quarter of 2016. While this rating from the Wells Fargo Housing Opportunity Index is down sharply from the last high of 77.5 noted in the first quarter of 2012, it remains far above the previous trough of 40.4 set in the third quarter of 2006.

Single-family new home sales, which dipped in August, rebounded by over three percent in September to 593,000 per year, and were up by nearly 30 percent year-over-year. So far in 2016, new home sales have averaged 564,000 per month. At current sales rates, existing inventory would take 4.8 months to sell, down a full month from a year ago.

For existing homes, sales also rebounded 3.2 percent in September to 5.47 million per year, but are up just 0.6 percent year-over-year. Much of this increase was due to the share of first-time buyers reaching 34 percent, for the highest rate seen in over four years. Although September inventory rose slightly to just over two million homes – or a timeline of 4.5 months -- it has fallen year-over-year for 16 consecutive months.

Looking ahead to 2017, pre-election forecasts had suggested a GDP growth rate of two percent. Meanwhile, the NAHB is calling for single-family starts to rise by 12 percent, multi-family starts to decline by two percent after a strong showing in recent years, and remodeling activity to surge by 23 percent. For all non-residential projects, Associated Builders and Contractors (ABC) is forecasting growth of three percent, with commercial projects rising by over eight percent and industrial projects shrinking four percent.

Wednesday, August 24, 2016

Economic Update: Overall Improvement since the First Quarter of 2016

In its July monthly meeting, the Federal Reserve Open Market Committee – which decides on interest rate policy – left the door open to whether or not we’ll see another rate hike in 2016. The good news is that the expected impacts from Brexit have been largely subdued.  In addition, the economy seems to be on a more normal path, with both June and July showing monthly job growth of 255,000 to 287,000, and an official unemployment rate of 4.9 percent.

GDP, which was just 0.8 percent in the first quarter of the year, was initially reported to have risen to 1.2 percent by the second quarter.  Moreover, in mid-August, the Federal Reserve Bank of Atlanta had estimated third-quarter GDP growth at 3.6 percent, and boosted its forecast for residential investment growth from 0.4 to 2.4 percent.

Inflation is also stable, with the Consumer Price Index flat in July but rising by just 0.8 percent over the previous 12 months.  However, when subtracting out the more volatile indicators for food and energy, prices have risen by 2.2 percent over the previous year.  With an annual inflation target of 2.0 percent, should job growth reports remain positive in the coming months, then the Federal Reserve may hike interest rates before the end of 2016. Still, not all sectors of the economy are feeling the inflation pinch, with the Producer Price Index falling 0.4 percent in July and still down 0.2 percent for the previous 12 months, which is also why a rate hike is not a given.

For now, consumers remain cautious, with The Conference Board’s Consumer Confidence holding steady at just over 97 on a 100-point scale in July after rising in June.  This latest survey suggests that although the economy will continue expanding at a moderate pace, attitudes regarding the job market and personal incomes remain cautiously optimistic.

Builder confidence is also positive, rising by two points to 60 in August, in which anything over 50 is positive.  The index measuring current sales rose two points to 65, while the index for sales expectations over the next six months rose one point to 67.

In the commercial real estate sector, CoStar’s value-weighted U.S. Composite Index, which focuses on the sales prices of higher-quality assets, advanced by 3.3 percent during the second quarter of 2016, while the equal-weighted U.S. Composite Index, which includes more sales of smaller properties, rose 2.1 percent. While the office, industrial and retail indices all rose by 1.9 percent and the multi-family index increased by a close 1.8 percent, by far the most improved sector was hospitality, rising 4.5 percent to within one percent of its former peak.

Looking closer at housing, sales of new single-family homes rose for the fifth straight month in July to surpass 650,000 annual units, for a notable jump of over 31 percent from July 2015 and reaching the highest pace of new home sales since October 2007. In addition, at this sales rate, existing inventory would take just 4.3 months to sell, versus 5.2 months a year earlier, and falling to the lowest inventory level since June 2013. For all of 2016, the NAHB is forecasting single-family home starts to rise by about 10 percent, as those in the multi-family sector level off.  Nonetheless, future residential growth will continue to be hampered by shortages of labor and lots and higher regulatory costs.

In the existing home market, after four consecutive months of increases, July sales not only tumbled by 3.2 percent from June, but were also down 1.6 percent from the same month of 2015.  NAR is blaming this on a lack of affordably priced inventory, especially for starter condominium homes. As proof of this, the Wells Fargo Home Opportunity Index fell to 62.0 percent in the second quarter of 2016, the lowest rate since the third quarter of 2014. Over the last year, inventory levels have fallen by 5.8 percent and have declined year-over-year for the last fourteen months.  Consequently, with some buyers priced out of the market even at low interest rates, overall inventory levels would take 4.7 months to sell, up from 4.5 months in June.

Of course this demand for new supply is certainly good news for builders!  Although July housing starts were up 5.6 percent year-on-year, building permits inched up only 0.9 percent for the same time period. Yet given the challenges facing the industry including regulations, labor shortages and the difficulty finding affordably priced land, lack of available housing supply may be with us for some time.

Monday, August 15, 2016

Consumer confidence inches up to 90.4 in August

Confidence inched upward in early August due to more favorable prospects for the overall economy offsetting a small pullback in personal finances. Home buying has become particularly dependent on low interest rates, with net references to low interest rates spontaneously mentioned by 48%.

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Builder confidence rises two points in August to 60

Builder confidence in the market for newly constructed single-family homesin August rose two points to 60 from a downwardly revised reading of 58 in July. The component gauging current sales conditions rose two points to 65, while the index charting sales expectations in the next six months increased one point to 67.

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Retail sales flat in July but still up 2.3 percent year-on-year

Retail sales were unchanged in July, coming off a revised 0.8 percent increase in June. Retail sales in June were previously reported to have increased 0.6 percent. Sales rose 2.3 percent from a year ago.