by Calculated Risk on 10/25/2018 04:21:00 PM
Thursday, October 25, 2018
CR Note: I've asked Brad Hunter for his thoughts on housing.
Hunter has been in the economic forecasting business for 32 years, and has made a name for himself tracking and forecasting the homebuilding business. He led a nationwide team of consultants in advising home builders (and their financiers) during his long tenure at Metrostudy.
He made several key calls of important turns (he warned his builder and financial clients of the dangers of overpaying for land in 2004/05, and he advised institutional investors to speculate heavily on land in 2009-2012). Here he lays out some of the key factors he sees driving the homebuilding business today. You can follow him at @bradleyhunter.
Home sales are reacting negatively to higher mortgage rates much the same way they did during the "Taper Tantrum" of 2013, when bond markets got the jitters and home sales dropped sharply as a result. Monthly-payment concern is about to become more of an issue for home sales.
A key question is how the home building companies will adjust to a rising-rate environment.
Homebuilders: "Lots" to Talk About
One of the main headwinds for homebuilding has been the supply (and therefore the price) of developed lots in locations where the builders want to build. The pace of lot development has not kept up with the need, particularly for builders who would like to build in a price range that middle-class people can afford.
Homebuilders are reporting fairly high levels of confidence these days, but they do say that lot prices are a major issue for them, as are material and labor costs. Most of these higher costs have been passed on to home buyers. At least so far. Lot costs have had the biggest negative effect on production of homes priced under $300,000, where there is the largest amount of under-served demand. I discuss this, along with the threat to affordability and home sales posed by tariffs, in my latest interview on Bloomberg Radio: Tariffs Are Big Concern For Homebuilders As Costs Rise (Radio)
My forecast of single-family home sales for the entire year 2018 is 613,000, virtually unchanged versus 2017, reflecting the rapid rate at which builders boosted prices this year. I am forecasting only a modest increase in single-family home sales and housing starts in 2019, reflecting increased affordability problems.
Builders will have to consider land parcels that are farther from the traditional urban cores in order to continue to produce homes that large numbers of households can afford.
The household formation numbers are once again strong. The demand is there. The builders who figure out how to capture that demand are the ones that will come out on top.
Home Price Appreciation: Tapping the Brakes
New data from the S&P CoreLogic Case-Shiller Index of home prices shows that the pace of home price increase is still elevated, but is finally starting to slow, as expected. Appreciation is in the 6% range, according to this measure of home prices, still much higher than the rate of income growth.
Las Vegas, Seattle and San Francisco currently lead the pack, all with double-digit rates of home appreciation.
We are seeing the beginning of a larger slowdown in appreciation. Home prices and monthly payments cannot continue to outrun buyers’ incomes for much longer.
I hasten to clarify that what I see coming is a slower rate of increase; not a nationwide decline in home prices. While a few markets may see some price declines in the months ahead, the overwhelming majority will continue to appreciate, just at a much slower pace.
My prediction going forward is that income ratios and rising interest rates will drive a leveling off of home prices, particularly in the most expensive markets in the country. My forecast is for home price appreciation of existing homes to slow to 4% in 2019, and I believe it could fall to the 2% range shortly after, on average.
Apartment Construction Pace is Finally Easing (a Good Thing)
Apartment construction boomed during the past seven years, and it is slowing now, so as not to get into an overbuilt situation. The apartment market is much more cyclical than single-family housing, more prone to getting ahead of demand. The slowdown in apartment construction is a helpful shift, in that it will reduce the likelihood or impact of a downturn.