Determined Optimism is the Key for Continued Success

The housing market trends of 2017 are likely to continue into 2018, but should no longer take anyone by surprise

By JACK SIMPSON

Builder sentiment for the new year is great, for quite a few reasons :

“A return to normal levels of housing production this month is expected after a very strong fall season,” said NAHB Chief Economist Robert Dietz. “We saw a surge of housing activity in the South after hurricane-related delays, and now that region is returning to its positive growth trend.”

As a newcomer to the homebuilding industry, I am certain that there are a great number of things I am not yet clued in on that might impact my ability to properly assess it.

However, with respect to that, I like to think of Jane Goodall who, with no prior experience with or even any knowledge to speak of, was dropped right into the thick of it to document the lives of chimpanzees. But it was precisely her lack of knowledge that made her so successful. Knowing nothing, she noted everything, and it was her curiosity and attention to seemingly inconsequential things – things that others before her had not paid much mind to – that laid the foundations for what we now understand about not only chimps, but other ape species as well.

Now, I’m not trying to make any undue comparisons – and forgive me if it seems like I’ve gone off on a tangent here – I just wish to illustrate the feeling of trying to take stock of everything while being out of one’s element. We’ve all been there, right? That being said, I quickly became aware and took note of the many, many challenges faced by last year’s housing market – and not just for prospective homebuyers, but builders as well. Even without taking into account the general political, social, and economic tumult of late, 2017 was just not a good year for housing. Very little, it seems, went according to plan.

2017 saw that record low inventory numbers would be just the kickoff for skyrocketing prices. Interest rates remained low, and an increase in new construction was supposed to add much needed inventory, helping to regulate rapidly inflating home prices. However, mortgage applications dwindled even as rates stayed low, as more and more people chose to rent or refinance. And though construction did pick up towards the end of the year, much of it was not at the price points where it was most sorely needed, resulting in an even more constrained supply of affordable housing and starter homes.

Additionally, new tariffs imposed on Canadian lumber coupled with labor shortages (in spite of extremely low unemployment rates and a growing construction job market, at that) ensured an uptick in construction costs, nudging home prices up even further. Wheels within wheels, as it were.

Then, of course, there was the battery of unprecedented extreme weather events in the latter half of the year. 2017 saw the biggest and most destructive hurricanes on record, in which, for just two examples, nearly 25 percent of homes in the Florida Keys were destroyed, as were upwards of 30,000 homes in the city of Houston alone. Then there were the fires that swept west, destroying several thousand properties and displacing some 100,000 individuals. Maybe it goes without saying, but these are all people in desperate need of homes at a time when homes are already hard to come by.

Even with all of the above holding true, 2018 was supposed to be a year in which the housing market would correct course. And, going into the new year, it is hard to imagine that there could be anything worse in store. And yet, so far, 2018 has been off to a slow, bumpy start. Housing starts are not where they were expected to be. However, this seems to be largely due to the U.S. finding itself in the midst of an unusually cold winter – this signified by its own sampler platter of weird weather, in the form of polar vortexes, bomb cyclones, and deep freezes.

I’m no expert, but after the unpredictability of last year (and even already in this year), there are a few sure bets for 2018. Housing affordability will continue to be a major issue – thanks in part to the Tax Cuts and Jobs Act of 2017 which works to disincentivize corporations from the purchasing of Low Income Housing Tax Credits, in turn disincentivizing the private creation of affordable housing. This will see that supply becomes be even more throttled. And these factors will not be restricted to high-demand, high-cost markets either. Instead, expect them to fan out to surrounding moderate-cost areas, as we have seen happen in and around the Los Angeles and Bay Areas.

Interest rates will also rise. Even though mortgage rates have hovered at historically low levels for quite some time now, The Federal Reserve is in talks of increasing its federal funds target rate, which controls other shortterm interest rates such as bank prime rates, the LIBOR, and most other adjustable-rate and interest-only loans and credit card rates, including adjustable-rate mortgages. Nevertheless, I remain eternally the optimist, and I believe that – with careful planning and a watchful eye – 2018 will be a year for the books.

Jack Simpson is an Assistant Editor at Builder and Developer magazine. He may be reached at jack@penpubinc.com.

Leave a Reply