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Housing: No records shattered, but progress nonetheless

June 26: Volume 32, Issue 1

By Reginald Tucker

 

Screen Shot 2017-07-05 at 9.45.38 AMThe U.S. housing market continued movement in a positive direction in 2016. Figures supplied by the U.S. Census Bureau show total housing starts reached 1.1738 million units last year—an uptick of 5.5% over 2015’s 1.1118 million units and nearly 17% over 2014. More importantly, it’s the highest number the industry has seen since 2007, when 1.355 million starts were registered. (If you recall, that’s the year before the housing market literally fell of the cliff.) For perspective, from 2008 through 2013, housing starts consistently dipped far below the 1 million contract benchmark, ranging between 608 million and 924 million starts over that time period.

But things have turned around since then. Based on a geographic breakdown of total housing starts—which includes both single- and multi-family units—the South region led the pack with just over 584,000 units—up 5.2%, while the West generated the second-highest number of starts at roughly 290,000, up 9.5%. The Midwest region came in third with just a little over 182,000 starts, an increase of 19% over 2015, while starts in the Northeast actually dipped 16% to 116,000.

In the bellwether single-family category, total starts in 2016 reached 781.5 million, an increase of 9.3%. The multi-family sector as a whole, however, did not fare quite as well last year, statistics show. Housing starts entailing five units or more came in a tad over 380,000 units in 2016, a 1.3% dip from 2015. Still, multi-family starts encompassing five units or more grew each year from 2009-14, starting with just 97,000 starts in 2009 and rising to just over 347,000 starts in 2014. Meanwhile, multi-family starts covering two to four units were flat in 2016, maintaining a meager level of just 11,500 ground breakings.

The year 2016 also finished strong in terms of value. Data analysis conducted by the National Association of Home Builders (NAHB) shows total private residential construction spending grew 0.5% in December 2016 to a seasonally adjusted annual rate (SAAR) of $466.9 billion. After slowing in August and September the SAAR of spending on residential construction finished 2016 with its third consecutive monthly increase. Looking at 2016 as a whole, the value of all private residential construction put in place reached $456.2 billion (not seasonally adjusted) in 2016, 5.2% higher than the total for 2015 ($433.7 billion).

In terms of housing sales, Business Insider called 2016 the “best year for the housing market since the financial crisis.” Total existing-home sales—completed transactions that include single-family homes, townhomes, condominiums and co-ops—finished 2016 at the highest level since 2006 (6.48 million), surpassing 2015’s 5.25 million, according to statistics released by the National Association of Realtors (NAR). “Solid job creation throughout 2016 and exceptionally low mortgage rates translated into a good year for the housing market,” said Lawrence Yun, the association’s chief economist.

Outlook for remainder of 2017
All this bodes well for the housing market this year, observers say, despite ongoing challenges facing the builder community. Fueled by a growing economy, solid employment gains and rising household formations, single-family production should continue on a gradual, upward trajectory in 2017. So said Robert Dietz, chief economist with NAHB, during an address to attendees of the International Builders Show in January.

“While positive developments on the demand side will support solid growth in the single-family housing sector in 2017, builders in many markets continue to face supply-side constraints led by the three ‘Ls’ – lots, labor and lending.”

Dietz added that 64% of builders nationwide report low or very-low lot supplies and that the rate of unfilled jobs in the construction sector is now higher than the building boom. What’s more, acquisition, development and construction loans for builders—while on the rise—needs to grow faster to meet demand, he added. “The industry needs to recruit more workers and get more land in the pipeline, but it will take time.”

However, Dietz stressed that these supply-side challenges are more than offset by continued economic growth, ongoing job creation, rising wages and favorable demographics. Moreover, builder confidence is up on anticipation the Trump administration will help lower regulatory costs going forward.

“Regulatory requirements make up nearly 25% of the cost of a new home,” Dietz explained. “Given those constraints, it is hard to build a $200,000, entry-level house.”

Other reports support a positive outlook. NAHB is projecting 1.16 million total housing starts in 2016, up 4.9% from the previous year’s total of 1.11 million units. Single-family production is expected to rise 10% in 2017 to 855,000 units and increase an additional 12% to 961,000 next year. Setting the 2000-2003 period as a benchmark for normal housing activity when single-family production averaged 1.3 million units annually, single-family starts are expected to steadily rise from 56% of what is considered a typical market in the third quarter of 2016 to 75% of normal by the fourth quarter of 2018.

On the multi-family front, NAHB is anticipating starts to hold steady in 2017 at 384,000 units, which would be 1,000 units above last year’s pace. While this level is slightly above trend, Dietz noted this pace is sustainable due to demographics and the balance between supply and demand. Also, as the economy continues to grow, NAHB expects mortgage interest rates will average 4.5% in 2017 and 5.3% in 2018. Meanwhile, residential remodeling activity is expected to register a 1% gain this year.

Policy impacts
Ultimately, observers say, continued progress will be contingent on the political climate. “Policy changes under the new Administration—in its nature, sequencing and magnitude—will determine the direction of economic growth in 2017,” said Doug Duncan, Fannie Mae chief economist. “Incoming data suggest improving consumer spending, diminished labor market slack and advancements in wages, but until we can more clearly read the political tea leaves, it’s difficult to say whether this late-cycle expansion will continue into its eighth year. Thus our theme for the year: ‘Will policy changes extend the expansion?’ If stimulus policy is enacted, it would likely add to growth but could also be offset by potential tightened trade policy given the already historically strong dollar.”

All things considered, Fannie Mae expects housing to remain resilient and continue its recovery in 2017, with affordability standing out as the industry’s greatest obstacle, particularly for first-time homeowners. “Demographic factors, however, are positive,” Duncan said. “Our research shows older millennials have begun to buy homes and close the homeownership attainment gap with their predecessors.”

Indeed, for the third straight year, millennials represented the largest group of recent buyers. According to a study compiled by NAR, this group accounts for 35% of all buyers, up from 32% in 2014. That’s more than the combined amount of younger and older boomers (31%). By comparison, Generation X represented 26% of buyers.

The study, titled “Home Buyer and Seller Generational Trends,” evaluates the generational differences of recent home buyers and sellers. It shows a growing share of homebuyers are millennials, and more of them are purchasing single-family homes outside of urban areas. The share of millennials buying in an urban or central city area decreased to 17% vs. 21% a year ago while fewer of them (10%) purchased a multi-family home compared to a year ago (15%).

Overall, the majority of buyers in all generations continue to purchase a single-family home in a suburban area, and the younger the buyer, the older the home they purchased.

Another interesting tidbit: While millennials may choose to live in an urban area as renters, the survey reveals that most aren’t staying once they’re ready to buy. “The median age of a millennial homebuyer is 30 years old, which typically is the time in life where one settles down to marry and raise a family,” NAR’s Yun explained. “Even if an urban setting is where they’d like to buy their first home, the need for more space at an affordable price is, for the most part, pushing their search further out.”