Growth Potential and Headwinds for New Home Construction

Robert Dietz, Ph.D.Vice President, Tax and Market Analysis@dietz_econ www.eyeonhousing.org

NATIONAL ASSOCIATION OF REALTORSRESIDENTIAL ECONOMIC ISSUES AND TRENDS FORUMMay 14, 2015

Home Construction (Single-Family) Continues to Lag the Overall Housing Recovery

Why?Demand is relatively weak

Rental continues to lead

SupplyProduction constraints hold back inventory

Presentation

Macroeconomic ConditionsDemand and What Builders are BuildingSupply Side HeadwindsForecastsLong-Run Optimism for Housing

Macroeconomic Conditions

Real GDP GrowthWeak First Quarters Holding Back Annual Gains

Real ConsumptionGrowth rate returning to pre-recession levels

Employment GrowthImproving employment growth to continue over 2015 and 2016

Consumer ConfidenceBack to pre-recession levels

Household Formations on the Rise?Uptick in year-over-year change in households

Thousands

Avg: 1.4 million(12% renters)

Avg: 0.5 million(130% renters )

Avg: 0.7 million(128% renters)

Effects on Housing Demand…And What Builders are Building

First-Time Home Buyer Share of Existing Home Sales

First-Time Home Buyer Share of New Home Sales

Homeownership and MarriageBoth declining for Millennials

Composition of Home Construction80% Typical Single-Family ShareCurrently Only 66%

Builders Shifted Production to Higher End of the Market

Custom Building Share Is Elevated

Condo Market Dormant – Multifamily Size Lower on Rental Concentration

Single-Family Rental Production Remains Small – But Elevated

When First-Time Buyers Come Back – Townhouse Market is Leading Indicator

Inventory of New Homes Growing…..Slowly

Supply Side HeadwindsThe 3 Ls (and 1M)

Labor SupplyA leading challenge for builders

Starts (000s)Low Supply

Lot SupplyShortage indicators rise and fall with level of starts, except recently

Lending (AD&C loans)Tight…

…But Easing

Bet

ter

W

orse

*SLOS – Senior Loan Officer Survey

Building Material PricesBuilders Reporting Increases in Last 6 Months

Building Material Prices

Forecasts

Remodeling Market Index (RMI)At or above 50 most of past 2+ years

Residential Remodeling Billions 2009 $, SAAR

Actual

Adjusted

Multifamily Production Index2+ years at or above 50

1995-2003 331,000 ”Normal”2011 178,0002012 247,000 39%2013 309,000 25%2014 355,000 15%2015 333,000 -6%2016 334,000 0%

Multifamily Housing Starts Healthy Response from Growth in Renters

Trough to Current:4th Q 09 = 82,0001st Q 15 = 333,000 +306%

2015Q1:97% of “Normal”

NAHB/Wells Fargo Housing Market IndexBuilders remain optimistic

Single-Family StartsContinuing to recover

Trough to Current:Mar 09 = 353,000Mar 15 = 618,000 +75%

2015Q1: 47% of “Normal”

2016Q4:81%

2000-2003 1,343,000 ”Normal”

2011 434,000 2012 537,000 24%2013 621,000 16%2014 646,000 4%2015 704,000 9%2016 977,000 39%

Positive Long-Run Outlook for Housing

Population by Single-Year of AgeRising population in prime household formation years

Millions

Born 1979 or later Born 1965-78 Born 1946-64 Born 1945 or earlier

Total Housing StartsExpected to normalize by second half of decade

Millions

Thank you to NAR and for your attendance

Questions?

Robert Dietz, Ph.D.Vice President, Tax and Market Analysis@dietz_econ www.eyeonhousing.org