A promising late-cycle housing rebound, but uncertainties remain
By PATRICK DUFFY
This is certainly an odd time for the U.S. economy, with oft-predicted warnings of recession on the horizon being largely ignored by both free-spending consumers and expanding companies. On the world stage, however, the combination of slowing growth, the contagion of negative interest rates to more regions, and a wobbling World Trade Organization are making the business of far-reaching predictions much more difficult. Fortunately, here at home, despite a widening partisan divide, a remarkably resilient economy, favorable demographics, and continuing pent-up demand continue to point a fairly rosy picture for the country’s housing market in 2020.
For this year, projections from the OECD, the IMF, and the World Bank are estimating global growth to range from 2.7 to 3.4 percent, with growth in the U.S. ranging from 1.7 to 2.1 percent, or considerably less than the growth rates noted in 2018 and 2019. Still, given November’s very strong jobs report and the official unemployment rate trending even lo er, the Federal Reserve’s own estimate of 2.0 percent growth for the U.S. in 2020 may also be adjusted upwards in the weeks ahead.
What keeps most global forecasters up at night these days are those surprising ‘black swan’ events, which can upset even the most sophisticated economic models. But even slow-motion events can impact those models, such as the gradual erosion of existing trade agreements over the last 18 months, immigration restrictions which have steadily bid up the cost of labor (especially for the con- struction trades), and a rising national debt which seems to see no sign of being seriously addressed. However, slow-moving events can also occur on the upside, such as increasing productivity due to technology advancements, revised and more fair trade agreements, and lower interest rates helping to improve housing affordability.
When it comes to building new homes to sell, the supply side enjoys several positive trends such as more millennials entering their homebuying years, continued growth in households and incomes, and a more accommodative central bank. With more adventurous buyers increasingly fleeing larger cities in search of more affordable housing in less populated areas – while often taking their remote jobs and start-up dreams with them – savvy builders can apply design lessons learned in urban centers and repeat or repurpose those concepts in outlying areas. In today’s America, walkable downtown areas including and surrounded by nearby housing are no longer reserved for the largest cities.
Nonetheless, and as mentioned routinely in the NAHB’s monthly Housing Market Index survey, builders continue to face challenges including constraints on labor, availability of suitable home sites, higher materials costs, and easy access to capital. Other evolving challenges include the impact to housing in high-cost states resulting from the 2017 tax reform law, more cities eliminating single-family zoning in favor of higher densities, and adult households with the means to own but choosing to rent.
It will likely be the larger national and regional players who will be able to compress margins to keep sales velocities constant against the backdrop of shifting sands. Others, who have already added rental homes to their business models, will be better able to switch between recurring and non-recurring revenue to meet market demand.
For the mostly multifamily rental market itself, with many apartment developers having already absorbed the low-hanging fruit of higher-income professionals demanding Class A, amenity-laden flats in popular cities, the next challenge is to provide more attainable housing for the Class B and C tenants who remain essential to how these same areas operate.
Although affordable housing financed by tax credits, bonds, and inclusionary zoning can address a portion of this demand, supplying the balance will require a shrinking of both building and operating costs, and that’s an area in which new technology can play an important role. For example, if the automation of finding suitable tenants and collecting monthly rents eliminates 30 percent of an operator’s workforce, that could lead to more competitive rents without unduly compressing margins.
Still, even with an economy that has helped more millennials to create more households with wage gains and improving sentiment, ongoing pent-up demand has pushed prices up far enough to put pressure on some local politicians in the form of supporting rent control. When coupled with NIMBYism and a reluctance of existing homeowners to approve the upzoning of neighborhoods, this only adds to more uncertainty and potentially declining supply. In that case, it will be the more forward-thinking states and cities to whom will go the spoils.