In 2017, we saw an economy and a housing market gaining
momentum, for one of the longest rebounds in modern history. For 2018, the
International Monetary Fund (IMF) is projecting global growth of 3.7 percent,
for a slight improvement over 3.6 percent in 2017.
Here in America – and due to a second half of
2017 that was much stronger than the first – the Federal Reserve is projecting
the U.S. economy to grow by 2.5 percent in 2018 after finishing 2017 with the
same growth rate.
For housing, although tax reform is likely to negatively
impact the housing market in both high-priced and second-home markets moving
forward, both the overall U.S. economy and new home sales are expected to
continue strengthening in the year head.
To combat future inflation, the Federal Reserve is planning on three
more rate hikes in 2018, and has stated that it sees some moderate additional
growth of about 0.4 percentage points in GDP resulting from tax reform.
However, what may be good for housing demand in terms of low
unemployment has also meant tighter labor market conditions, especially for
skilled construction trades. As of
October 2017, open jobs in the building industry rose to nearly 230,000, likely
setting the stage for higher wage growth ahead.
In addition, the cost of building materials continues to rise,
especially for wood products and for Canadian lumber subject to a 21 percent
excise tax.
Although an analysis funded by the National Association of
Realtors has suggested that tax reform could lower housing prices throughout
the country, a larger problem may be that it could discourage existing
homeowners from selling to take on pricier non-grandfathered mortgages, or even
stay in place for five rather than two years to save on capital gains
taxes. In both of these scenarios, the
pace of sales could slow at a time when more supply is needed.
Of course one question mark will be the mindset of
Millennials, some of whom are now at that age where they’re starting to form
new households, and even leaving urban areas in search of more affordable
options in the suburbs.
According to
NAR’s 2017 Profile of Buyers and Sellers, the share of sales to first-time
buyers averaged 34 percent during the year, down one percentage point of 35
percent. Still, given that the share of
first-time buyers since 1981 has averaged 39 percent, builders have a unique
opportunity to fill in the gap by focusing more on the Milllennial cohort.
One way builders are responding to Millennial demand includes
building smaller single-family homes, with the median size falling by nearly
four percent to 2378 square feet between the third quarters of 2014 and 2017.
For multi-family homes, median home sizes fell by 1.5 percent during the same
time period to 1168 square feet.
Even with these changes, however, the industry is still
catching up from the Great Recession in many areas. According to the National Association of Home
Builders/First American Leading Markets Index (LMI) for the third quarter of
2017, markets in just 58 percent of the 337 metro areas nationwide returned to
or exceeded their last normal levels of economic and housing activity, for a
net gain of about 40 markets over the previous year. Nationally, the index stood at 1.03, meaning
that the nationwide average is running at 103% of normal economic and housing
activity.
Nonetheless, the individual components of the LMI have not
recovered equally: While employment has reached 99 percent of normal activity
and home prices have rebounded to 155 percent of normal, single-family permits
are running at just 56 percent of historic norms.
In order to address this disconnect between supply and
demand, the Rosen Consulting Group recently conducted its own study for the
NAR. In its recent white paper “
Rebuildingthe American Dream: Strategies to Sustainably Increase Homeownership,” Rosen’s
team identifies 25 ideas to bolster homeownership.
While some suggestions are
repeats of past ideas – such as addressing restrictive zoning laws, offering
down payment savings programs, tackling the burden of student debt, and a
nationwide counseling program for homeowners who previously experienced
foreclosure and may be hesitant to consider buying a home again – others are
more focused on emerging technologies in the industry or even re-thinking land
use strategies. These include promoting
more pre-fabricated or modular housing, boosting training and apprenticeship
programs, and more liberal use of Accessory Dwelling Units (ADUs), such as
granny flats, on single-family lots in high-cost areas.
With new supply seemingly under assault from
multiple causes, multiple solutions will likely be required.
