The B&D Interview: Christopher Thornberg, Founding Partner, Beacon Economics

Christopher Thornberg shares his economic insight for the year ahead

Builder and Developer Magazine: What overall trends do you expect to shape the homebuilding market in 2020?

Christopher Thornberg: I think it’s going to be up. You know, at the start of 2019 everybody was going crazy with predictions of housing meltdown 2.0. It’s funny, because I remember even then saying “This is ridiculous; it doesn’t make any sense.” You look at the fundamentals of the market, whether it’s the slow pace of building and a record low percent of years for sale and for rent in the US economy, whether you’re looking at the incredibly clean mortgage markets or the overall health of the American consumer sector, this is not a market that was bound for a meltdown.

Now, what did slow it down was the spike in interest rates we saw last year when mortgage rates briefly touched 5 percent in the third or fourth quarter last year. You know, the relationship between interest rates and the market is quite lag, usually between six months to a year. Well, then you flash forward to the panic — unnecessary panic, but panic nonetheless — in the first and second quarter of this year, the big rally in the bond market, mortgage rates falling back to 3.5 percent… Low and behold, near the end of this particular year, you’re already starting to see all signs of acceleration of the housing market. Prices are re-accelerating, you’re seeing more sales activity, and so on and so forth.

So if you’re just talking about housing in general, it’s clear that 2020 is going to be a good year.

But the other thing that people aren’t talking about here is that for all the negativity about the US economy in 2019, the other side of it is this. Believe it or not, 2019 was the best year for new home sales since 2007. Now mind you, pretty weak still, nothing compared to where we were in 2004, 2005, or 2006, but nevertheless, it was a good year. Homeownership rates are starting to rise again. So you have an overall housing market that’s got this wind behind it, and then add the fact that you’re finally starting to see a re-engagement of homeownership, new home sales, and more ownership overall, and what you end up with is what’s going to be, I expect, a very good year — for new residential single-family, particularly.

B&D: What economic factors are largely shaping these trends?

CT: The fact that interest rates are down and overall there is an ongoing healthy, strong, economy. Unemployment is at a record-low level and incomes are going up.

B&D: Concerns with affordability are a big topic in the housing industry. What can builders do to address it?

CT: This kind of stuff makes me crazy. What affordability issues?

If you take a look at the data for the American Community Survey, we just got the 2018 now, and if you look at households with a mortgage, the share of income being used to pay housing costs for people with a mortgage has been falling for the last decade, not rising. It’s falling. I would argue that you are seeing an increase in the ownership rate, and that does suggest that there is going to be new interest in entry-level housing. Now, that’s a separate conversation. If you have an increase in ownership rate, you should be thinking about building in that entry-level space. But overall, affordability in the housing market is not bad at all.

As much as it’s hard to believe, that statement is even true for California. Because as much as home prices have gone up, incomes of homeowners have gone up even more. So again, if you look at that median housing cost to income ratio in California and in the nation, it’s falling, not going up.

B&D: What advice do you have for builders to succeed in 2020?

CT: You better go out and start training more carpenters, plumbers, and electricians.

B&D: Let’s talk about the labor shortage. What are the key points there?

CT: The key points are this. You know, from 2002-2006 or 2007, the unions were going crazy, bringing in members and training new folks. Then, when all hell broke loose, they suddenly found themselves unable to supply work to their members, and it became a huge problem for them.

So now, you fast forward to the last few years, and even though the housing market has been strong, they have been remarkably reluctant to bring new members on. They’re not training and they’re not being aggressive in terms of apprenticeships because they looked back in time and realized, “last time we got excited and look how it hurt us; look how it hurt our members.” So here we are. And while overall unemployment in construction is considerably lower now than it was 15 years ago, nevertheless, you have this shortage of uptrained folks.

So, again, I go back to that basic idea. You’ve got to get out there and get people trained.

B&D: Is there anything you’d like to add that you feel is key to the overall economic outlook that I may have missed?

CT: I’m going to go back to my broader point. For the last year, all these economists have been doing nothing but talking the US economy down, talking about the end of the expansion, talking about how bad things are about to get, and in reality, when you take a step back and look at the underlying data, that’s a bunch of hooey! The reality is, the US economy is on a nice, steady path — not too cold, and equivalently, not too hot. And as a result of that, people should continue to move forward, continue to plan, and continue to expect good things ahead. Don’t buy into this crazy miserablism. Don’t buy into it, because it’s not there.

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