The enormous residential real estate market reaches into all corners of the US economy, from employment to finance to retail, so it’s important to understand its performance. Today we explore the state of the US housing market, how it’s impacting the economy as a whole, and our CRE business in particular.
The good news right now, according to economist Danielle Hale with the National Association of Realtors (NAR), is that housing is strong. Home sales through July show 5.59 million homes changing hands YTD, the fastest pace in 10 years. July sales are well up from this time last year across all regions and for the past 7 consecutive months. Current owners are seeing their equity restored or increased. In all regions, existing homes have recovered most if not all of the value lost in the downturn. “Home prices are rising,” Hale noted. “While the median price of a new home is only up 2%, existing home values are up nearly 5%. Median value exceeded peak 2006 prices this year, according to NAR data. The median cost of a home was $236,300 as of June – an all-time high since data has been collected. Other sources reinforce that prices are close to previous peaks. Some very hot markets are pricing well above that mark.
New Homes Lagging
While new home construction is picking up, it’s not as much as we’d like. New home sales are up 28% from last year, but supply is low, and that’s driving the price increases. Demand will continue to build, eventually encouraging more supply. Job growth has been plentiful this year - more than 200,000 per month. The economy added 1.3 million new jobs in the first half. This should drive increased household formation. Incomes are inching up: median earnings of employees rose 2.1% in the second quarter.
Existing home price
New Home price
New home sales
First half of 2015
Not If But When
What happens when interest rates increase? While entry-level buyers will bear the most impact, since it curtails what they can afford, Hale believes this will actually help the market. It will increase home-buying action, spurring lookers to become deciders. Expect a big surge of activity as rates begin to rise, when those who’ve been hesitating jump into the market.
Is the Chinese economic downturn and resulting fluctuations of the US stock market affecting our housing market? Here at home wobbles in the stock market can create uncertainty. But sometimes that uncertainty is a positive, incentivizing people to invest in something solid: their home.
9% sell stocks and bonds to get down payment
Another 9% use 401k funds
4% of homebuyers are international buyers
This market dip is considered short term and not expected to have broader effects. Purchases of U.S. real estate by Chinese and other foreign investors is a standard hedge against volatility abroad, and the Chinese are still buying higher end homes. The most active regions are in Florida, California, Texas, and Arizona, which account for half of all international home sales. Foreigners are purchasing nationwide, taking advantage of government incentives.
Buyers are grabbing up homes at above median prices. In hot markets, prices are topping the records. But pent up demand for homes is significant. However, lower tier homes aren’t selling as well. Hale doesn’t believe that investors in the single-family market pose a threat to the market. Those investors are going to make sure their properties hold their value. When prices get high enough, they will realize their gain, easing the market. “We’re bullish on US housing, Hale asserts. “The market has recovered nicely and isn’t making any sudden moves.”
The Really Big Picture
I asked Mitch Rochelle of Price Waterhouse Cooper (PWC) for his analysis of the housing market and its effect on commercial real estate. He pointed out there is a deluge of housing data; it’s important to cut through the noise and focus on the economic indicators. Housing is essentially the real indicator of the economy. “The American dream of owning a home is essential to sustain ongoing growth in the U.S. economy,” Rochelle noted. “Residential housing drives so many industries: construction, finance, law, retail, manufacturing and more. Americans’ housing decisions profoundly affect the entire US economy.” The market has fully recovered for existing homes, but the new home business is not doing as well. The pace of job creation hasn’t been replaced, Rochelle explained, because we’re not building homes at the pace we used to. There are more home sales today against the 25-year average, but they’re not new homes. The housing market and jobs are intimately interrelated. PWC looked all the way back to 1965 labor force participation data and determined that today, home ownership is at a historic low. Since the financial crisis the correlation rate between workforce participation and home ownership rate is .97 – as close to perfect rate as it gets.
Interest Rates Rising
Does the fed consider the housing industry in their decision process? Housing numbers are looked at closely by policy makers. They are asked to consider reams, tons of data, but since the housing market is such a huge factor in the economy, they are definitely factoring that in.
Media and the Market
Housing data is pretty hot news. As soon as housing numbers drop, the financial press responds same-day. Job data follows a week later. These numbers are very significant to the whole market. Traders are parsing what’s going on, understanding how it’s tied into the rest of the world.
Housing’s Impact on CRE Sectors —
Multifamily real estate represents more than 8 million households for which new homes have not been constructed. Household formation is defined as when a young person moves out of their parents’ home. We have tremendous demand, but haven’t substantially added to single family inventory. Eight million in the rental pool is unsustainable. The rental market is begging for less demand rather than new supply.
How does housing impact retail or retailers? First thing a homeowner needs is a home improvement store. Then they purchase furnishings, household goods, and supplies. Since we aren’t creating new rooftops we’re not creating the demand for new retail.
What is the impact the office market? If you look at suburban office rather than CBD, there’s significant impact. In 2006 50% of suburban tenants had ties to the housing market – mortgage agents, land planners, lawyers, appraisers, closing and title companies. That’s mostly dried up, and the demand now is for medical, to serve the aging population.
Moving forward we expect this pace to continue, including the tiny growth in housing starts. From month to month weather and economics will move, but we’re still climbing out of a deep drop for new construction, and trying to smooth out against the 25-year average.
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