The B&D Interview: Ralph McLaughlin, Deputy Chief Economist of CoreLogic

Ralph McLaughlin breaks down the latest market data, preparing builders for the rest of the year

Builder and Developer: How can builders prepare for an expected upcoming shift to a buyer’s market?

Ralph McLaughlin: We don’t necessarily think that the housing market is going to shift at large into a buyer’s market. We think there may be isolated markets that may shift to neutral, or maybe somewhat into a buyer’s market, but that most markets across the country will remain at, at least slightly, a seller’s market.

We want to be very clear that we are not expecting a buyer’s market across the country. Some of those markets happen to be in the Pacific Coast: some particular places like San Francisco, San Jose, Los Angeles, and Orange County. San Diego may start to slip somewhat into a buyer’s market, but in the rest of the country, demand still looks very, very healthy; homes are quite affordable, and that will keep home demand high.

That being said, we have seen demand at the high end really start to wane. We think one of the reasons why prices are starting to moderate nationally, and in those expensive markets in particular, is because home prices have become increasingly unaffordable to many buyers.

One of the ways builders can potentially prepare for a shift, at least to a neutral market or at least a slow-growth market, would be shifting to a product that is on the more affordable side – maybe a product that is priced similarly to existing homes (I know is hard is hard to do when you’re building new homes but that’s where the demand is). Maybe it’s building a smaller product on smaller lots, or perhaps building attached single-family units instead of detached. Any product that would help lower the price point, especially to help young, rent-burdened households get their foot into the door in the housing market, could be a shift.

I think we are starting to see some signs – at least nationally – that that’s happening. The median size and median price of a new home has fallen over the last year or so. I think that is some indication that builders are starting to recognize the affordability constraints in some of our largest markets.

B&D: How do metropolitan markets set the trend for the national market?

RM: It depends on the metropolitan market. If big markets, like those in the Pacific Coast, in particular L.A., or big markets in the East, like New York or D.C., really go through a drastic change, we might see that pick up on the national number.

I think the collective downturn that we’ve seen on the Pacific Coast is actually starting to show up in the slowing home price growth rate on a national level.

Usually it’s not just one market that would shake national markets, but if a collection or subset of markets really start to move in tandem, like we’re seeing on the Pacific Coast, then that can start to affect the national market or affect national numbers.

Builders need to be cognizant that there is no one single U.S. housing market. It’s a collection of individual metropolitan markets. So while you could see cool-down occurring along the Pacific Coast, there are still places in the U.S. where there is a healthy, solid demand for homes. Places like Vegas, Phoenix, Dallas, Houston, Austin, and South Florida, are all places where demand is still relatively healthy.

So even if we see change in a subset of markets, it doesn’t mean that there aren’t opportunities in other markets that aren’t going through those changes.

B&D: What effect are millennial homebuyers having on these metro markets?

RM: Millennial homebuyers, and their younger, Gen-Z counterparts, are going to have a tremendous boost to the U.S. housing market over the next ten years.

These households are young. They are “adulting” later in life than their parents’ and grandparents’ generations. There are signs that the oldest ones are starting to do adult-like things –getting married and starting to have kids. These are all things that help spur demand to become an owner/occupier.

As the bulk of Millennials and Gen-Z start to come of age – and that’s going to happen over the next five or 10 years – that’s going to be an enormous amount of energy released into the U.S. housing market and into the owner/occupier side of the market as they enter their 30s and 40s. They are going to have tremendous impact on both the national U.S. housing market, but also on markets that are fast-growing and relatively affordable.

As the Millennials and Gen-Z go, so does the rest of the housing market, and things look quite bright over the next 10 to 20 years for that reason.

B&D: What major change(s) do you expect to see through the rest of the year?

RM: We expect the housing market to go through somewhat of a U-turn, so to speak. We have seen prices slow. We expect them to continue to slow over the next three to five months, but then we expect them to pick back up at the end of the year.

Our house price forecast over the next three to five months is for home prices to grow anywhere between two and three percent nationally, but we expect that number to come back up to around four or five percent by the beginning of 2020.

We expect this lull and softening demand to be temporary, and we expect the real demographic underpinnings of housing demand in the U.S. to continue to bully up the housing market, at least through the remainder of this economic expansion and then, of course, in the long run through about 2040.

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