A Closer Look At Housing Trends And The Building Products Industry
As the economy continues to recover from the recession following the market crash of 2008, a wide variety of projections have been made about the response of the building industry to a return to prosperity and consumer confidence in the economy as a whole.
Predictions are generally favorable, while some in the industry anticipate a return to the highs immediately preceding the crash of 2008. This white paper will examine the state of the housing market in its relation to the building products industry, specifically, what current trends in housing can reveal about the future health and stability of the building products industry.
Measuring Builders’ Confidence
A recent report by the National Association of Home Builders declared that the confidence among members of the building industry had achieved the highest levels seen since November of 2005:
Since early summer, builders in many markets across the nation have been reporting that buyer interest and trafc have picked up, which is a positive sign that the housing market is moving in the right direction…a firming job market is helping to unleash pent-up demand for new homes and contributing to a gradual, upward trend in builder confidence… 1
Factors Affecting Market Recovery
The state of the housing industry is affected by a mixed-bag of conditions in key sectors. These include:
• Tight credit conditions, but a silver lining: Consumers continue to face daunting financing conditions. Real estate database Zillow believes mortgage rates will rise modestly to settle at 5% by the end of 2014. The Fed’s new leadership is expected to continue the policy of buying blocks of mortgage-backed securities. Erin Lantz, director of Mortgages at Zillow, notes: “While this will make homes more expensive to finance – the monthly payment on a $200,000 loan will rise by roughly $160 it’s important to remember that mortgage rates in the 5 percent range are still very low.” Lantz believes “the silver lining to rising interest rates is that getting a loan will be easier. Rising rates means lenders’ refinance business will dwindle, forcing them to compete for buyers by potentially loosening their lending standards.”
• Home prices will rise. Both Zillow and Redfin predict the increase to be between 3% and 5%. Dr. Stan Humphries 2 , Zillow’s chief economist, thinks “This year, home value gains will slow down significantly because of higher mortgage rates, more expensive home prices, and more supply created by fewer underwater homeowners and more new construction.”
• Decline in affordability. Income levels are not keeping pace with the rising costs of housing. The National Association of Realtors’ Home Affordability Index dropped to a five-year low in 2013. Market watchers predict this trend will continue in 2014.
• Decline in ownership. Zillow’s chief economist predicts that home ownership levels will drop below 65% — the lowest since 1995. “The housing bubble was fueled by easy lending standards and irrational expectations of home value appreciation, but it put a historically high number of American households – seven out of ten – in a home, if nly temporarily. That home ownership level proved unsustainable and during the housing recession and recovery the home ownership rate has floated back down to a more normal level, and we expect it to break 65% for the first time since the mid-1990s.” Added is the prediction that adult children who moved back home during the recession are expected to move out from parents homes – into apartments, not homes, helping further to lower ownership levels.
• Recovery will be regional. More Americans will move, predicts Redfin 3. New lending restrictions will encourage buyers to opt for smaller homes in more affordable locations, like Portland, Atlanta, Denver, and much of Texas.
• Investors less of a factor in current market activity. During the boom, as many as one in every five houses was purchased by investors. This is no longer the case; average Americans are the primary consumers in the current market.
• Rising costs. Builders face across the board increases for materials, lots, and labor.
• A new bubble? In 2013 Zillow polled experts 4 concerning whether current monetary policy risked the creation of a new housing bubble. 96% of responders claimed they saw at least some risk due to two housing market distortions: high negative equity and low mortgage rates.
Household Formation and the Housing Market
Household formation is a prime indicator of the health and growth of the housing market, bearing substantial impact upon the demand for housing: ‘the equilibrium rate for housing starts should be a function of household formation.’ 5
Household formation fell drastically in 2007, and despite five years of economic growth, levels remain low. Continued weakness in the economy and a corresponding lack of consumer confidence have hindered the rebound of household formation.
Shift To Multifamily Housing
A significant component of the recovery in the housing market has been the construction of multifamily properties. Demand has grown steadily for apartments, from a low of 58,000 in 2009 to 420,000 in 2014. Multifamily construction has accounted for half the cumulative gain in construction starts following the market crash, a considerable gain given that multifamily housing only made up 19% of housing starts at the trough. 6
As apartments grow larger to meet the new demand for rented living space, the individual units themselves are getting smaller. In 2013 41% of new apartment units were under 1000 sq, feet as compared to 26% in 2006. Overall, per unit the median square footage has fallen by almost 10% from 2006.
Making Do With Less
As the housing market shifts, many consumers are opting for smaller living spaces and/or fewer amenities. Median square footage for single-family homes has increased 6% since 2006, but apartment units have shrunk by about 10%. And while more than half (54%) of apartment units built in 2013 had 1.5 or fewer baths, only 5% of single-family homes built last year featured fewer than 2 baths.
The housing market is making a steady recovery from the recession. There are, however, several factors that are affecting the pace and nature of this recovery.
• Credit constraints continue to limit access to home financing
• Investors are far less active in the housing market than pre-2007
• Home ownership will decline below 65%
• Recovery will be regional
• Increases in the labor, lots, and materials costs
• Household formation has not returned to pre-2007 levels
• Shift in consumer demand from home ownership to renting
• The recovery in the housing market has been fuelled by the increased demand for multifamily housing
• Single-family housing is declining as a percentage of total construction
• Apartments are smaller and have fewer amenities
The housing market has emerged from the recession transformed. The declines in home ownership have been balanced by a shift toward multifamily housing. While this shift has accounted for much of the market’s vitality, the units constructed on the whole are smaller, with fewer amenities.
The current complexion of the housing market is favorable to building products industry. However, instability remains in the market as consumer confidence in the economy remains shaky: 2014 began with a slow start that picked up steam in the second half. The unpredictability of the market tempers optimism, and it remains unlikely that over-all gains will approach the peaks of pre-2006.
1 Source: National Association of Home Builders: http://www.nahb.org/news_details.aspx?sectionID=134&newsID=16995
2 Source: http://www.forbes.com/sites/stanhumphries/2014/08/07/the-downside-of-uphow-rising-mortgage-rates-will-lead-to-lower-sales/
3 Source: Redfin: http://www.redfin.com/research/reports/specialreports/2013/texas-real-estate-rivalries-how-austin-dallas-and-houston-stack-up.html; http://www.forbes.com/sites/bruceupbin/2013/12/17/redfinceos-top-predictions-for-u-s-housing-in-2014/
4 Source: http://www.zillow.com/research/economists-home-valueappreciation-to-exceed-5-percent-through-2013-4733/
5“Housing’s Heartache.” A Bank of American, Merrill Lynch report (8 July, 2014).