A Look Ahead to 2018: All systems go, but tax reform impact unknown

In 2017, we saw an economy and a housing market gaining momentum, for one of the longest rebounds in modern history. For 2018, the International Monetary Fund (IMF) is projecting global growth of 3.7 percent, for a slight improvement over 3.6 percent in 2017.

Here in America – and due to a second half of 2017 that was much stronger than the first – the Federal Reserve is projecting the U.S. economy to grow by 2.5 percent in 2018 after finishing 2017 with the same growth rate.

For housing, although tax reform is likely to negatively impact the housing market in both high-priced and second-home markets moving forward, both the overall U.S. economy and new home sales are expected to continue strengthening in the year head.  To combat future inflation, the Federal Reserve is planning on three more rate hikes in 2018, and has stated that it sees some moderate additional growth of about 0.4 percentage points in GDP resulting from tax reform.

However, what may be good for housing demand in terms of low unemployment has also meant tighter labor market conditions, especially for skilled construction trades.  As of October 2017, open jobs in the building industry rose to nearly 230,000, likely setting the stage for higher wage growth ahead.

In addition, the cost of building materials continues to rise, especially for wood products and for Canadian lumber subject to a 21 percent excise tax.

Although an analysis funded by the National Association of Realtors has suggested that tax reform could lower housing prices throughout the country, a larger problem may be that it could discourage existing homeowners from selling to take on pricier non-grandfathered mortgages, or even stay in place for five rather than two years to save on capital gains taxes.  In both of these scenarios, the pace of sales could slow at a time when more supply is needed.

Of course one question mark will be the mindset of Millennials, some of whom are now at that age where they’re starting to form new households, and even leaving urban areas in search of more affordable options in the suburbs.

According to NAR’s 2017 Profile of Buyers and Sellers, the share of sales to first-time buyers averaged 34 percent during the year, down one percentage point of 35 percent.  Still, given that the share of first-time buyers since 1981 has averaged 39 percent, builders have a unique opportunity to fill in the gap by focusing more on the Milllennial cohort.

One way builders are responding to Millennial demand includes building smaller single-family homes, with the median size falling by nearly four percent to 2378 square feet between the third quarters of 2014 and 2017. For multi-family homes, median home sizes fell by 1.5 percent during the same time period to 1168 square feet.

Even with these changes, however, the industry is still catching up from the Great Recession in many areas.  According to the National Association of Home Builders/First American Leading Markets Index (LMI) for the third quarter of 2017, markets in just 58 percent of the 337 metro areas nationwide returned to or exceeded their last normal levels of economic and housing activity, for a net gain of about 40 markets over the previous year.  Nationally, the index stood at 1.03, meaning that the nationwide average is running at 103% of normal economic and housing activity.

Nonetheless, the individual components of the LMI have not recovered equally: While employment has reached 99 percent of normal activity and home prices have rebounded to 155 percent of normal, single-family permits are running at just 56 percent of historic norms.

In order to address this disconnect between supply and demand, the Rosen Consulting Group recently conducted its own study for the NAR.  In its recent white paper “Rebuildingthe American Dream: Strategies to Sustainably Increase Homeownership,” Rosen’s team identifies 25 ideas to bolster homeownership.

While some suggestions are repeats of past ideas – such as addressing restrictive zoning laws, offering down payment savings programs, tackling the burden of student debt, and a nationwide counseling program for homeowners who previously experienced foreclosure and may be hesitant to consider buying a home again – others are more focused on emerging technologies in the industry or even re-thinking land use strategies.  These include promoting more pre-fabricated or modular housing, boosting training and apprenticeship programs, and more liberal use of Accessory Dwelling Units (ADUs), such as granny flats, on single-family lots in high-cost areas.

With new supply seemingly under assault from multiple causes, multiple solutions will likely be required.

December column for Builder & Developer magazine now online

My column for the December 2014 issue of Builder and Developer magazine is now posted online.

For this issue, entitled "Homebuilding Year in Review," I provided my annual review of the past year and what we can expect in 2015. An excerpt:

Last year, I wrote about a housing rebound that seemed to finally have solid legs after a few false starts since the Great Recession. The good news for 2014 is that both the economy and the housing market have continued their slow yet gradual climb back to normal.

Indeed, the NAHB's Leading Markets Index, which measures how well metropolitan areas are performing relative to their last ‘normal’ market, rose to .90 in the third quarter of 2014. This means that the combination of permits, prices and employment levels are back to 90 percent of where they should be at a national level, although most of this rebound has been due to new permits and rising prices more than robust, uniform employment gains...

To read the entire column, click here.

To read the entire December 2014 issue in digital format, click here.

2014 in Review: A Slow, Gradual Return to Normal

Last year, I wrote about a housing rebound that seemed to finally have solid legs after a few false starts since the Great Recession.  The good news for 2014 is that both the economy and the housing market have continued their slow yet gradual climb back to normal.

Indeed, the NAHB’s Leading Markets Index, which measures how well metropolitan areas are performing relative to their last ‘normal’ market, rose to .90 in the third quarter of 2014.  This means that the combination of permits, prices and employment levels are back to 90 percent of where they should be at a national level, although most of this rebound has been due to new permits and rising prices more than robust, uniform employment gains.

Still, the national job market continues to improve strongly, adding well over 200,000 jobs per month for most of the year, thereby bringing the official unemployment rate down to 5.8 percent.  Since this rate of growth is about double the pace required to reduce unemployment and under-employment, wages could soon come under pressure to rise after years of being stuck near neutral, which could counter-act the impact of future interest rate hikes and higher housing prices.

At the same time, the economic rebound has not been consistent across the country, with much stronger job growth in those states which have benefitted from the domestic energy boom, military or agricultural spending, or include small college towns.   Conversely, those states with weaker labor markets – such as Arizona, Nevada, Rhode Island or New Jersey – also continue to exhibit weaker housing fundamentals.

Nonetheless, from a confidence standpoint, both builders and consumers have been reporting positive attitudes, with the NAHB Housing Market Index rising four points in November to 58, with even stronger gains for the index measuring current sales conditions.  Consumer sentiment has recently been even stronger, rising in November to more than a seven-year high even though respondents don’t expect future income gains to keep up with inflation.

While overall housing starts did take an unexpected but small dip in October from the previous month, they still rose by nearly eight percent year-over-year.  At the same time, starts for single-family homes were still up by just over four percent between September and October to the highest rate since November of 2013.   But it was really building permits – often a forward-looking indicator of market activity – which revealed gradually building strength for housing, rising by nearly five percent in October to the highest level in nearly 6.5 years.

New home sales have also continued to climb, rising by 17 percent between September of 2013 and 2014 to an annual rate of 467,000 units, which would take 5.3 months to sell at current sales rates, down from 5.5 months the previous year.  New home median prices, however, fell to $259,000 from $269,800 during that same time period, most likely due to a higher percentage of sales in the South.

For existing homes, sales rose in October for the second straight month after a challenging spring and relatively flat summer, reaching their highest annual rate since September of 2013 as well as being above year-over-year levels for the first time in over a year.  At the same time, inventory levels fell to a 5.1-month supply, which was the lowest supply timeline since last March.  Existing home prices reached $208,300 in October, up by 5.5 percent over the same month of 2013 and marking the 32^nd straight month of year-over-year price gains.

The remodeling market is also strong, with the NAHB Remodeling Market Index matching its record high of 57 in the third quarter of 2014 even after a dip in activity earlier in the year due to an unusually harsh winter.

Looking ahead to 2015, forecasts are generally calling for continuing expansion for both the U.S. economy and its housing market.  U.S. GDP is expected to sustain its 3.0 percent growth rate due to ongoing fiscal stimulus, lower energy costs (especially for gasoline), slowly easing credit conditions and more positive business and consumer confidence.  However, a stronger dollar will likely dampen exports, and the Fed will probably start boosting its Federal funds rate sometime in 2015.

As for housing, look for housing starts to rise by another 20 percent in 2015, with most of that increase noted for single-family homes built to fulfill a large supply of pent-up supply over the past few years.  Still, as household formations increase in 2015, look for the rental market in urban markets to remain tight as rent growth exceeds inflation.

BuilderBytes' MetroIntelligence Economic Update for 10/11/13

Please click here to see the edition of BuilderBytes for 10/11/13 on the Web.

In this issue of the MetroIntelligence Economic Update, I covered the following indicators:

• 52 housing markets have now returned to or exceeded pre-recessionary levels
• Consumer credit rose in August but credit card use declining

Want to advertise in the newsletter and reach over 130,000 readers? Contact National Sales Manager Nick Cosan at nkosan@penpubinc.com.

BuilderBytes' MetroIntelligence Economic Update for 10/9/13

Please click here to see the edition of BuilderBytes for 10/9/13 on the Web.
In this issue of the MetroIntelligence Economic Update, I covered the following indicators:

• 52 housing markets have now returned to or exceeded pre-recessionary levels
• Consumer credit rose in August but credit card use declining

Want to advertise in the newsletter and reach over 130,000 readers? Contact National Sales Manager Nick Cosan at nkosan@penpubinc.com.