Economic and Housing Outlook NACO July 15, 2018 Robert Dietz, - - PowerPoint PPT Presentation

Economic and Housing Outlook

NACO July 15, 2018 Robert Dietz, Ph.D. NAHB Chief Economist

GDP Growth

Stronger growth expected post-tax reform

Source: U.S. Bureau of Economic Analysis (BEA) and NAHB forecast.

• 10%
• 8%
• 6%
• 4%
• 2%

0% 2% 4% 6% 8% 10% 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 Q/Q Percent Change, SAAR Annual Growth LT avg (‘58-’07) 3.4% 2016 1.5% 2017 2.3% 2018f 2.9% 2019f 2.7% 2020f 1.8%

Expansion is is Aging

Current expansion is 108 months old – second longest

106 92 120 73 20 40 60 80 100 120 Dec 1854 Dec 1858 Jun 1861 Dec 1867 Dec 1870 Mar 1879 May 1885 Apr 1888 May 1891 Jun 1894 Jun 1897 Dec 1900 Aug 1904 Jun 1908 Jan 1912 Dec 1914 Mar 1919 Jul 1921 Jul 1924 Nov 1927 Mar 1933 Jun 1938 Oct 1945 Oct 1949 May 1954 Apr 1958 Feb 1961 Nov 1970 Mar 1975 Jul 1980 Nov 1982 Mar 1991 Nov 2001 Trough to Peak, Months

Source: The National Bureau of Economic Research (NBER).

Labor Force Partic icip ipation Rate

Improving labor force participation key to future growth

Source: U.S. Bureau of Labor Statistics (BLS).

78% 79% 80% 81% 82% 83% 84% 85% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 59% 60% 61% 62% 63% 64% 65% 66% 67% 68% Percentage, SA

Overall Age 25-54

Tig ight Labor Market

Source: U.S. Bureau of Labor Statistics (BLS) and NAHB forecast.

2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

Job Openings Rate Unemployment Rate

Percent, SA Percent, SA

How low can unemployment go?

Cumula lativ ive Change in in Emplo loyment by Age Group

• 10
• 5

5 10 15 20 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Millions of Employees, SA

55 and Older Under 55

Source: U.S. Bureau of Labor Statistics (BLS).

Mind the Gen-X gap

Ris isin ing Producer Pric ices

0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1

• 10
• 5

5 10 15 20 25 48 50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18

12-month Percent Change, SA Source: U.S. Bureau of Labor Statistics (BLS).

Target Federal l Funds Rate

Fed will continue to raise rates

Source: Federal Reserve data and NAHB forecast.

6.5% 5.3% 1.9% 2.7% 3.1% 6.0% 4.8% 2.9% 3.3% 3.4%

0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 10-year Treasury

Federal Funds Rate

30 30-Year Fix ixed Rate Mortgage and 10-Year Treasury ry

Rates will rise due to Fed policy and tight labor markets

Source: Federal Reserve and Freddie Mac data and NAHB forecast.

0% 2% 4% 6% 8% 10% 12% 0% 2% 4% 6% 8% 10% 12% 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

October 31, 2016

30-Year Fixed Rate Mortgage 10-Year Treasury Mortgage Risk Premium (Difference)

Housing Demand and Affordability

Ris isin ing Population Entering Housing Demand Years: 2017

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 3 6 9 12 15 18 21 24 27 30 33 36 39 42 45 48 51 54 57 60 63 66 69 72 75 78 81 84 87 90 93 96 99 Avg=4.3 Millions Gen Z: Born After 1997 Gen X: Born 1965-1980 Baby Boomers: Born 1946-1964 Silent Generation: Born 1928-1945

v

Headship rates increase from 15% to 45% Greatest Generation: Born Before 1928 Millennials: Born 1981-1997

Household Bala lance Sheets

5.8% 7.2% 5.0% 4.4% 6.7% 6.3% 6.0% 4.9% 5.9%

1 2 3 4 5 6 7 8

4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Mortgage Consumer

Source: U.S. Board of Governors of the Federal Reserve System (FRB). % of Disposable Inc., SA

A shift in debt away from mortgages

Consumer Debt

151%

80%

97% 226% 95%

1 2 3 4 5 6 7 8

0% 50% 100% 150% 200% 250% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Auto Loans Student Loans Credit Cards Other

Rise in student and auto loans

Source: Federal Reserve Bank of New York.

Exis isting Home Sale les

2 4 6 8 10 12 14 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 05 06 07 08 09 10 11 12 13 14 15 16 17 18 Existing Home Sales: Single-Family & Condo & Co-op, (Ths., SAAR) Number of homes available for sale: Single-Family & Condo & Co-op, (Ths., NSA) Thousands Months’ Supply (Months, NSA)

Months’ Supply Existing Home Sales Existing Home Inventory

Low inventory

Source: National Association of Realtors (NAR).

S&P/Case-Shil ille ler Natio ional US Home Pric ice In Index

Source: S&P Dow Jones Indices LLC; CoreLogic, Inc. and NAHB forecast.

Prices growing faster than income

• 20
• 15
• 10
• 5

5 10 15 20 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 Percent Growth, SAAR

Housin ing Affordabil ilit ity – NAHB/Wells ls Fargo HOI

Source: NAHB/Wells Fargo Housing Opportunity Index.

78 62

20 30 40 50 60 70 80 90 Q1_04 Q1_05 Q1_06 Q1_07 Q1_08 Q1_09 Q1_10 Q1_11 Q1_12 Q1_13 Q1_14 Q1_15 Q1_16 Q1_17 Q1_18

National

Affordability declining

Sim imula lating Future Affordabil ilit ity Condit itio ions

Source: NAHB/Wells Fargo Housing Opportunity Index.

78 62 Q2 2019, 56, with 5% mortgage rate 20 30 40 50 60 70 80 90 Q1_04 Q1_05 Q1_06 Q1_07 Q1_08 Q1_09 Q1_10 Q1_11 Q1_12 Q1_13 Q1_14 Q1_15 Q1_16 Q1_17 Q1_18 Q1_19 Q1_20

National

Distribution of MSAs by change in the HOI using forecast prices, income, and interest rates

Declines of more than 10% 37% Declines of 5 to 10% 25% No change to 4% decline 36% Gain of 1 to 5% 1%

HOI declines due to higher rates and costs/prices despite rising incomes

Supply-Side Headwinds

Buil ildin ing Materia ials – Softwood Lumber

263

150 170 190 210 230 250 270 2012 2013 2014 2015 2016 2017 2018

Index 1982=100, NSA Source: U.S. Bureau of Labor Statistics (BLS).

Since January 2017, Random Lengths Framing Composite Price Index up 63%

Labor

Elevated count of unfilled construction jobs

• 0.10

0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1.00 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 Job openings rate - Construction 12-month moving average

Source: U.S. Bureau of Labor Statistics (BLS).

Agin ing Labor Force for Constructio ion

Construction Sector Productiv ivity

Lagging overall economy

0.4 0.6 0.8 1.0 1.2 1.4 1.6 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 Construction Worker Productivity Overall Worker Productivity Index, 1993 = 1

Lots

Housing Starts (Area) and Low/Very Low Lot Supply (bars)

0% 10% 20% 30% 40% 50% 60% 70% 300 600 900 1,200 1,500 1,800 2,100 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 Starts (Thousands) Low Supply

Lendin ing – AD&C Access

0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% $- $20,000 $40,000 $60,000 $80,000 $100,000 $120,000 $140,000 $160,000 $180,000 $200,000 07 08 09 10 11 12 13 14 15 16 17 18 1-4 unit Residential Construction Loans Year-over-Year Growth Rates Millions

Regula latory ry Costs Ris isin ing – Up 29% Over Last 5 Years

Total effect of building codes, land use, environmental and other rules

Regula latio ions - 32% of Mult ltif ifamil ily Develo lopment Costs

4.8% 7.3% 2.3% 2.3% 4.2% 5.5% 4.0% 5.3% 3.9% 5.4%

5.9% 8.4% 5.2% 7.0% 7.1%

Lower Quartile Average Upper Quartile

Cost increases from changes to building codes over the past 10 years Development requirements that go beyond the ordinary Fees charged when building construction is authorized Cost of applying for zoning approval Other (non-refundable) fees charged when site work begins Cost of complying with OSHA requirements Others 21.7%* 32.1% 42.6%*

Government Regulations as a Share of Multifamily Development Costs

Note: * For quartiles, all types of costs do not sum to the total. Source: NAHB/Wells Fargo HMI survey.

New NAHB-NMHC research

Forecasts

Household Formation

• 1,000
• 500

500 1,000 1,500 2,000 Y/Y Change in Household Count, Thousands, NSA

Owner-Occupied

• 1,000
• 500

500 1,000 1,500 2,000 2,500 2010 2011 2012 2013 2014 2015 2016 2017 2018

Renter-Occupied

Source: U.S. Census Bureau (BOC): Housing Vacancies & Homeownership.

Demand for home ownership strengthening

Homeownership Rate

69.4% 64.2%

• 0.10

0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1.00 61% 62% 63% 64% 65% 66% 67% 68% 69% 70% 71% 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 Percentage, Quarterly, SA

Source: U.S. Census Bureau (BOC): Housing Vacancies & Homeownership.

NAHB/Wells ls Fargo Housin ing Market In Index

70

200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 10 20 30 40 50 60 70 80 05 06 07 08 09 10 11 12 13 14 15 16 17 18 Index Thousands, SAAR

Single-Family Starts HMI

Nearly two-decade high for builder confidence

Source: Census Bureau and NAHB/Wells Fargo HMI survey.

200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 Thousands of units, SAAR

80% fall

2018Q1: 66% of “Normal” 2020Q4: 76% of “Normal”

2000-2003 1,343,000 “Normal” 2015 713,000 2016 785,000 10% 2017 852,000 9% 2018 910,000 7% 2019 959,000 5% 2020 1,003,000 5%

Sin ingle le-Famil ily Starts

Modest growth ahead

Trough to Current: Mar 09 = 353,000 Apr 18 = 894,000 +153%

Source: Census Bureau and NAHB forecast.

Sin ingle le Famil ily Housin ing Starts– Trough and Current

Source: Census Bureau.

National average single family starts bottomed out at 27% in early 2009 and reached 66% of normal in 2018Q1.

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 110% 120% 130% 140% 150% M I N V I L A Z M N C O C A F L G A O H I N M O W I N H C T R I O R N J M D I D K Y U T A K K S M A V T N M N C M E H I V A N Y P A T N I A W V W A D C N E D E S C S D M S N D A R T X A L O K M T L A W Y Current Trough Housing Starts / Average 2000-03 Starts

US

Home Pric ices of New and Exis istin ing Homes

Wide gap since 2012

$0 $20,000 $40,000 $60,000 $80,000 $100,000 $120,000 $0 $60,000 $120,000 $180,000 $240,000 $300,000 $360,000 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 Median Sales Price Difference

1990-2008 Avg: $20,000

New Homes Existing Homes

Typic ical New Home Siz ize

1600 1700 1800 1900 2000 2100 2200 2300 2400 2500 2600 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

SF Starts: Median Floor Area SF Starts: Median 1 Year MA

Square Feet

Decline after market shift

Townhouse Market Expandin ing

0% 2% 4% 6% 8% 10% 12% 14% 16% 10 20 30 40 50 60 70 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 SF Starts: Attached Townhouse Share: 1-Year Moving Average Thousands, NSA

Mult ltif ifamil ily Housin ing Starts

Leveling off

1995-2003 331,000 “Normal” 2015 394,000 2016 393,000 0% 2017 356,000

• 9%

2018 377,000 6% 2019 354,000

• 6%

2020 351,000

• 1%

Source: Census Bureau and NAHB forecast

50 100 150 200 250 300 350 400 450 500 550 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

Trough to Current: 4th Q 09 = 82,000 1st Q 18 = 427,000 +421%

2018Q1: 129% of “Normal” Thousands of units, SAAR

76% fall Avg=344,000

2020Q4: 105% of “Normal”

National average multifamily starts bottomed out at 25% in late 2009 and were 129% of normal in 2018Q1.

Mult ltif ifamil ily Housin ing Starts – Trough and Current

Source: Census Bureau.

• 25%

0% 25% 50% 75% 100% 125% 150% 175% 200% 225% M I A Z N V C O A K G A I D O R N M R I F L S C O H M T N E I L W I C A W A M N M S K S K Y H I I N O K T X I A W V P A T N M O W Y L A U T N C M D N Y A L V T M E V A A R S D M A N D N H D C N J C T D E Current Trough Housing Starts / Average 1995-2003 Starts

US

Resid idential l Remodeli ling

Strong market conditions

25 50 75 100 125 150 175 200 225 250 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 Billions, SAAR

Adjusted Actual

Year Percent Change 2016 11% 2017 17% 2018f 7% 2019f 8% 2020f 6%

Source: Census Bureau and NAHB forecast.

The Age of the Housin ing Stock

Typical home is almost 40 years old

32% 12% 16% 15% 17% 9% 38% 15% 13% 15% 16% 3%

45 years old or more 35-45 25-35 15-25 5-15 5 years old or less 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 2005 2015

Thank you

Questions? rdietz@nahb.org @dietz_econ eyeonhousing.org housingeconomics.com