December column for Builder & Developer now posted online

My column for the December 2016 issue of Builder and Developer magazine is now posted online.

For this issue, entitled "2016 in Review:  Continued Recovery from The Great Recession," I reviewed the current state of the U.S. economy and what we can expect in 2017.

An excerpt:

U.S. GDP—which had hovered closer to 1.0 percent during the previous three quarters—surged to 2.9 percent in the third quarter, due mostly to rising inventory of goods, higher exports, and more federal government spending.

Job growth, which rose by 161,000 in October, has averaged 181,000 per month throughout 2016. Although this is down 21 percent from 2015’s average level, it is still more than enough to keep up with population growth and continue putting downward pressure on the official unemployment rate.

To read the entire column, click here.

To read the entire December 2016 issue in digital format, click here.

A Look Ahead to 2017: Higher Interest Rates and Tight Housing Inventory

As recently as early November, most economists were working on their forecasts assuming things would remain much the same under a Clinton Administration. However, given the stunning Electoral College victory of Donald J. Trump – perhaps the world’s most famous builder and developer – most of those prognostications are now simply their best guesses.  Indeed, political uncertainty has emerged as the most important externality impacting not just the U.S. economy, but that of the world as well.

For 2017, the International Monetary Fund (IMF) is projecting global growth of 3.4 percent (2.2 percent for the U.S.) versus 3.1 percent in 2016 (1.6 percent for the U.S.), with this higher growth rate attributed mostly due to greater stabilization for energy and commodity prices as well as continued low interest rates.

However, the same forecast is also mindful of the potential economic fallout from political instability not just here at home, but also across Western and Eastern Europe, the Middle East as well as parts of Asia and South America.

So what does that mean for a Trump Administration?

It depends a lot whether or not the new President takes his own campaign promises seriously or literally.

In 2017, the general prognosis is for another good year for the housing market, which will also continue to be hamstrung by affordability pressures, high costs for finished lots, and a shortage of construction labor.

Given that 25 percent of construction jobs are held by foreign-born workers, stricter immigration policies could worsen this problem. Much of this impact could hit the types of starter homes demanded by Millennial buyers, who are expected to make up about one-third of the overall market.

In addition, Mr. Trump’s planned fiscal stimulus plans are already being baked into the financial markets cake, with interest rates for conforming, 30-year fixed rate mortgage rates rising by over 40 basis points within one month after November’s election. While that may require buyers to lower their sights on a certain price range, overall access to mortgage financing is expected to improve as both Fannie Mae and Freddie Mac increase the price of the homes they’ll back, while larger financial institutions have re-introduced mortgages with as little as one to three percent down.

Should Trump reverse the lending regulations required by Dodd-Frank, we would also expect to see the lending spigot open further, as the onus for foreclosed mortgages returns to the buyers versus the lenders who made them. Moreover, as interest rates rise and the percentage of refinancing drops, lenders will be more interested in making up that shortfall with more purchase loans.

The year 2017 should also be the start of an important demographic change, in which more higher-income Baby Boomers are retiring than can be replaced by younger Millennials moving into the workforce. We’ll start to see the impact of this over the next five to ten years, mostly in the form of more Millennials forming new households and buying that first starter home, many of which could be in more affordable, second-tier suburbs or cities.

However, given that demand for new homes may continue to exceed supply for several more years, that imbalance could continue to push prices up, thus exacerbating affordability constraints when also taking into consideration higher interest rates.

New home production will also remain tight by historical terms, as any favorable changes in national policy will take time to reach the construction site. Even though the national Leading Markets Index has returned to 98 percent of normal, new home production remains stubbornly low at about 60 percent of historical norms. While new home inventory did rise by just over nine percent between October of 2015 and 2016, the inventory timeline still shrunk from 5.6 to 5.2 months.

For now, builders are responding to affordability issues by building smaller single-family homes when possible, with the median size falling by over 1.5 percent to 2402 square feet between the third quarters of 2015 and 2016. At the same time, the median size for multi-family homes rose by five percent to 1092 square feet, as higher-quality townhomes, condominiums and apartments offer an acceptable single-family home substitute for entry-level buyers.

Finally, today’s greater aversion to risk may also impact the move-up market, especially if potential buyers with mortgage rates under four percent choose to stay in place by remodeling instead of leaping up to that next rung on the housing ladder.  In that case, higher interest rates may trump – pun intended – other factors.

Here’s to a happy and successful 2017!