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Growth Potential and Headwinds for
New Home Construction
Robert Dietz, Ph.D.
Vice President, Tax and Market Analysis
@dietz_econ www.eyeonhousing.org
NATIONAL ASSOCIATION OF REALTORS
RESIDENTIAL ECONOMIC ISSUES AND TRENDS FORUM
May 14, 2015
Home Construction (Single-Family) Continues to Lag
the Overall Housing Recovery
Why?
Demand is relatively weak
Rental continues to lead
Supply
Production constraints hold back inventory
Presentation
Macroeconomic Conditions
Demand and What Builders are Building
Supply Side Headwinds
Forecasts
Long-Run Optimism for Housing
Macroeconomic Conditions
Real GDP Growth
Weak First Quarters Holding Back Annual Gains
Real Consumption
Growth rate returning to pre-recession levels
Employment Growth
Improving employment growth to continue over 2015 and 2016
Consumer Confidence
Back to pre-recession levels
Household Formations on the Rise?
Uptick in year-over-year change in households
Thousands
Avg: 1.4 million
(12% renters)
Avg: 0.5 million
(130% renters )
Avg: 0.7 million
(128% renters)
Effects on Housing Demand…
And What Builders are Building
First-Time Home Buyer Share of Existing Home Sales
First-Time Home Buyer Share of New Home Sales
Homeownership and Marriage
Both declining for Millennials
Composition of Home Construction
80% Typical Single-Family Share
Currently Only 66%
Builders Shifted Production to Higher End of the Market
Custom Building Share Is Elevated
Condo Market Dormant – Multifamily Size Lower on Rental Concentration
Single-Family Rental Production Remains Small – But Elevated
When First-Time Buyers Come Back – Townhouse Market is Leading Indicator
Inventory of New Homes Growing…..Slowly
Supply Side Headwinds
The 3 Ls (and 1M)
Labor Supply
A leading challenge for builders
Starts (000s)
Low Supply
Lot Supply
Shortage indicators rise and fall with level of starts, except recently
Lending (AD&C loans)
Tight…
…But Easing
BetterWorse
*SLOS – Senior Loan Officer Survey
Building Material Prices
Builders Reporting Increases in Last 6 Months
Building Material Prices
Forecasts
Remodeling Market Index (RMI)
At or above 50 most of past 2+ years
Residential Remodeling
Billions 2009 $, SAAR
Actual
Adjusted
Multifamily Production Index
2+ years at or above 50
1995-2003 331,000 ”Normal”
2011 178,000
2012 247,000 39%
2013 309,000 25%
2014 355,000 15%
2015 333,000 -6%
2016 334,000 0%
Multifamily Housing Starts
Healthy Response from Growth in Renters
Trough to Current:
4th
Q 09 = 82,000
1st
Q 15 = 333,000
+306%
2015Q1:
97% of
“Normal”
NAHB/Wells Fargo Housing Market Index
Builders remain optimistic
Single-Family Starts
Continuing to recover
Trough to Current:
Mar 09 = 353,000
Mar 15 = 618,000
+75%
2015Q1:
47% of “Normal”
2016Q4:
81%
2000-2003 1,343,000
”Normal
”
2011 434,000
2012 537,000 24%
2013 621,000 16%
2014 646,000 4%
2015 704,000 9%
2016 977,000 39%
Positive Long-Run Outlook for Housing
Population by Single-Year of Age
Rising population in prime household formation years
Millions
Born 1979 or later Born 1965-78 Born 1946-64 Born 1945 or earlier
Total Housing Starts
Expected to normalize by second half of decade
Millions
Thank you to NAR and for your attendance
Questions?
Robert Dietz, Ph.D.
Vice President, Tax and Market Analysis
@dietz_econ www.eyeonhousing.org

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Residential Issues And Trends Forum Robert Dietz, PhD NAHB

Editor's Notes

  1. Overall economic growth will continue to be positive, but weakly. 2012 growth came in at 2.2% for the year. The most likely outcome is slower but reasonably steady growth of 1.8% in 2013 before rising to 2.6% in 2014. The sequester and tax increases passed in early 2013 will have some slowing effects in the second and third quarter of 2013. Source: Bureau of Economic Analysis, National Association of Home Builders
  2. Overall economic growth will continue to be positive, but weakly. 2012 growth came in at 2.2% for the year. The most likely outcome is slower but reasonably steady growth of 1.8% in 2013 before rising to 2.6% in 2014. The sequester and tax increases passed in early 2013 will have some slowing effects in the second and third quarter of 2013. Source: Bureau of Economic Analysis, National Association of Home Builders
  3. Overall economic growth will continue to be positive, but weakly. 2012 growth came in at 2.2% for the year. The most likely outcome is slower but reasonably steady growth of 1.8% in 2013 before rising to 2.6% in 2014. The sequester and tax increases passed in early 2013 will have some slowing effects in the second and third quarter of 2013. Source: Bureau of Economic Analysis, National Association of Home Builders
  4. Overall economic growth will continue to be positive, but weakly. 2012 growth came in at 2.2% for the year. The most likely outcome is slower but reasonably steady growth of 1.8% in 2013 before rising to 2.6% in 2014. The sequester and tax increases passed in early 2013 will have some slowing effects in the second and third quarter of 2013. Source: Bureau of Economic Analysis, National Association of Home Builders
  5. Household formations have finally started to pick up, especially compared to the very low rates of net additions to the total number of households in 2007 through 2010. The fully normal rate of additions should be around 1.2 million per year, so the 860,000 recent average is moving in that direction. Many of these newly formed households are renters, but still represents more home building and eventually, many of those renters will become home owners as well as more homeowners trading up.
  6. So economy is growing, jobs are growing….there’s pent-up demand…..what about the supply side. Growth – and building is growing – creates its own challenges. Let’s look at lots, labor, lending (and materials)….4th L????
  7. Up about 17% for res ADC over last 4 qtrs.: (sf starts up 20% YOY)….
  8. Of the three legs of home building, remodeling had the least collapse and has recovered to levels of early 2000s. The remodeler index has been at or above the tipping point of 50 for six of the last seven quarters.
  9. Remodeling has improved as home owners decide to remain in place rather than move. The first half of 2013 is expected to be weak, but growth should pick back up by the second half of the year. And, as moving does return, remodeling will benefit from existing home buyers fixing their homes after a move. Source: U.S. Census Bureau, NAHB Economic and Housing Forecast.
  10. Multifamily sentiment has also passed the 50 tipping point for nine consecutive quarters and has demonstrated some predictive power to actual multifamily starts.
  11. Multifamily has been a different story as rental demand picks up. 2011 was a banner year and 2012 followed closely with an almost identical increase in number of additional starts (64,000 and 65,000). The improvement continues because all of the added household formations are becoming renters. For a while, excess vacancies and conversion of foreclosures into rental satisfied that demand, but that cannot continue to more rental production is needed. Real rents have started to increase reflecting the increased demand and some return to a normal market. The sector will continue to grow but at lower rates.
  12. Of the three legs of home building, remodeling has recovered the most and is back up to levels of early 2000s. The remodeler index has been at or above the tipping point of 50 for two out of the last three quarters.
  13. Once home sales pick up, housing starts will follow. 2011 was the worst year since the early 1940s so there is a lot of room for improvement. 2012 and 2103 saw modest improvements. 2014 will temper that speed as consumers readjust to a slower growing economy.
  14. 5 to 6 million additional population over next 10 years