It’s a new year with a new administration and new uncertainty. In an effort to provide some clarity, we interviewed some of the brightest minds in the industry to get their take on different factors that could affect the homebuilding industry throughout 2017.
Tim Sullivan, Managing Principal at Meyers Research
Mark Boud, Chief Economist at Metrostudy
John Burns, CEO at John Burns Real Estate Consulting
Robert Dietz, Chief Economist at the National Association of Home Builders
Join Tim Sullivan and John Burns on Day 1 (Wednesday, June 28) of The Re-Think Conference at 10:00-12:15 when they present "Opening Perspective: The Way Things Are" and "Big Shifts Ahead."
What’s the biggest change the new administration can make that will impact either economic growth or the housing market (good or bad)?
Tim: So far, we’ve seen a positive reaction to our new president in the form of higher confidence (on both a consumer and business level) and the stock market (different indices have hit all-time highs). That aside, our president has been very clear with business owners that he wants to keep jobs within our country. We know most cities have seen solid employment growth since the trough, but the emphasis on “America First” could benefit a lot of the laggard Midwest and Northeast markets. Besides the aforementioned regions, many companies across industries and geographies are creating more jobs in the US, including Sprint, Amazon, and Wal-Mart. Diversified employment staying in the states will be great for the domestic housing market. There are some potential downsides to protectionist policies, but that discussion is for another day.
John: Stimulating job growth will do the most to impact housing demand. Loosening the lending requirements a bit to give lenders a little more judgment to make good loans would help as well.
Mark: Two things:
- Unraveling of trade agreements (good for China, bad for US) – it may help US job growth in the near-term, but it promotes inflation and reduces job growth in the longer term.
- Pending increases in infrastructural spending and kicking out illegals (14% of the construction labor pool is illegal) – this will have a big impact on inflating construction labor costs in an industry that is already grappling with high labor costs.
Robert: There are a number of policy changes that the new presidential administration, working with Congress, could adopt to improve the housing economy. The primary challenge for housing market nationwide is a lack of existing home inventory. Due to a lack of inventory, home prices are rising faster than incomes. However, home builders are only increasing production at a modest pace, particularly for entry-level housing.
Part of the reason for the lack of stronger growth rates for builders has to do with cost. While most new construction is built for move-up buyers (historically 30% of new homes are purchased by first-time buyers, while in recent years that share has been closer to 20%), builders have found it ever more difficult to build entry-level housing given rising regulatory burdens. In fact, over the last five years, NAHB Economics estimates that regulatory costs at the state, local and federal levels have grown by 29% and now make up approximately a quarter of a new home’s final price. Reducing these costs, via smart and efficient regulatory policy, should be a key focus of the Trump administration. And keep in mind that then-candidate Trump promised to reduce these costs when he spoke to the NAHB Board of Directors in August of last year.
Where do you think mortgage rates will finish at the end of 2017? Will rising rates slow demand for housing?
Tim: We saw mortgage rates spike right after the election, rising to 4.3% from 3.5%. Since then, rates retreated, now hovering around 4.2%. We anticipate rates will range between 4.6% and 4.7% by the end of this year. Luckily, for most markets across the country, that increase isn’t enough to stall the housing market; a 50 basis point jump from today doesn’t increase the monthly payment substantially.
John: The bond market indicates to me that rates will be around 4.5% at year end.
Mark: 4.75%. As rates rise, it may actually increase market activity for a few months as an increasing number of potential buyers seek to take advantage of a closing window of opportunity.
Robert: NAHB’s macroeconomic forecast has the 30-year fixed rate mortgage rising to an average rate of 4.5% for 2017. Rising rates will dampen demand for for-sale housing, but given that the primary constraint on the demand-side of the market is accumulation of the necessary down payment, our model indicates that the primary effect of rising rates will be reduced rates of home price growth. This is not to minimize the impact that rising rates will have on the market, but it is important to keep in mind that rates will be rising because of tight labor market conditions, which will increase inflation, and a general expectation of faster, yet still modest, GDP growth due to the 2016 election. Tight labor markets will increase wage growth, which in turn will help prospective homebuyers, including renting members of Generation Y, to save for a down payment. The challenge for builders will be to manage production costs against a backdrop of rising mortgage rates, even as demographic conditions remain favorable for housing demand.
What/Where do you think the biggest opportunity is this year?
Tim: Our research shows 30% of Millennials want to buy in the next 1-3 years, with an additional expecting to buy in 3-5 years. This offers a huge opportunity.
John: Surban housing (bringing the best of urban to the suburbs) will be the best opportunity. Lenders are foreclosing on retail centers that need to be repositioned with housing. This will create great opportunities for builders, although I am concerned that cities are losing an important portion of their revenue. Mark: Entry level housing. We’re not building nearly enough homes directed toward Millennials. We’re increasingly ‘top heavy’ in many markets, i.e. too many executive move-up homes, not enough entry level homes.
Robert: For 2017, the market will examine whether entry-level home building can expand and meet the need of rising demand. Data for 2016 saw declines for median new home size, after years of increases, as the entry-level market grew. Townhouses, which on average are approximately 2,000 square feet, offer a good example of market that has outpaced overall single-family home sector over the last two years. Townhouses, and other medium-density home options, also offer a solution to another supply-side challenge, lack of land and lots. According to an NAHB survey, 64% of home builders reported low or very low lot supplies in their market last year. Building with density, where the market demands it, offers a business opportunity provided local government enable such development.
How will foreign money/buyers impact the housing market throughout 2017?
Tim: In some cases, the gateways cities no longer offer the deals some foreign buyers are used to, so we are seeing them shift to other markets in the states. Besides individual buyers, we are also seeing more Asian companies providing equality or partnering with US firms to develop in the states.
John: The tremendous wealth creation in China and India, brought on by their booming economies, should continue to drive more buyers to the United States. We monitor these economies closely for our clients who cater to this group.
Mark: Foreign demand will slow, partly due to a perception that pricing is at a plateau.
Robert: Predicting foreign buyer activity in the U.S. real estate market is more difficult in 2017 than in prior years. While the U.S. has seen growth in foreign buyers of new and existing homes (and strength in some individual sectors, such as condo resales in Miami and New York), a significant wild card could change things this year and next. If federal tax reform is enacted that includes border-adjustability (an international tax rule that would effectively make it more expensive to import and more profitable to export), then the value of the dollar could increase substantially. I’m skeptical of what is known as a full offset due to the tax change, but even a partial reset could cause the dollar to rise 15% or more. This type of currency market effect would have significant impacts on foreign purchases of U.S real estate by reducing foreign demand. Whether tax reform with such border rules will ultimately be enacted is currently unclear.
Is a recession looming?
Tim: Assuming some of the new administration’s pro-growth policies are implemented successfully, this could push out the next downturn longer than previously thought. We are currently on the fourth longest expansion in history, and luckily, expansions don’t just die of old age. Where we stand right now, we aren’t seeing imminent red flags. Our advice is to hire cautiously and manage expenses carefully. Have a contingency plan to deal with any possible market shifts.
John: Nope. We think three sectors are overheated, and one of them is large enough to cause a national recession, but we don’t think that will happen in 2017.
Mark: With Trump, we project more intense economic growth in the short-run (1-3 years) with a harder landing in a more severe recession beginning in the 2019/2020 time frame.
Robert: No. GDP growth was disappointing in 2016, achieving only a 1.6% growth rate. NAHB is forecasting stronger growth in 2017 and 2018 with rates above 2% for each year. We have marked up our forecast due to the growing prospects of regulatory reform and growth-enhancing fiscal policy. However, the current growth cycle is aging and the odds of a recession are rising. Builders should be prepared that the odds are not insignificant of a recession occurring over the next four or five years. That said, such a future recession, if it occurs, is likely to be mild and last few quarters, in stark contrast to the Great Recession. Moreover, the years of underbuilding of homes, as the home building rebuilds its infrastructure of workers, land and financing, mean that housing will likely play its traditional role of helping to lead the economy out of any future soft patch. Tight existing home inventory, reduced levels of single-family construction, and favorable demographics all point to growth for residential construction in the years ahead.
Check out the other articles in our 2017 Trends Series:
Meyers Research, a Kennedy Wilson Company, combines experienced real estate and technology advisors with leading data to provide our clients with a clear perspective and a strategic path forward. Based in Beverly Hills, we are home to 80 experts in 10 offices across the country.
Metrostudy, a Hanley Wood company, is the leading provider of primary and secondary market information to the housing and related industries nationwide. Established in 1975 in Houston, Metrostudy provides research, data, analytics and consulting services that help builders, developers, lenders, suppliers, retailers, utilities and others make investment and business decisions every day.
John Burns Real Estate Consulting is an independent research provider and consulting firm focused on the housing industry. We compile and analyze an unprecedented volume of information to keep our clients informed.
NAHB is a trade association that helps promote policies that make housing a national priority. Since 1942, NAHB has been serving its members, the housing industry, and the public at large.