Housing’s 2010 Megatrends — It’s About Talent
We’re prone to shameless sentimentality every day of the year, every year of a decade, so why would today be any different?
In our series of 2010 single-family housing megatrends that trace to genuine achievement among leading home builders in 2009, we start with this thought. Getting through this is hard, and finding solutions to survive is hard.
Sometimes, cliche though it might be to say it, the solutions sit right next to you, literally. For instance:
- Right outside our office door sits Sarah Yaussi, editor of Big Builder. Sarah applied for a writing job with Big Builder five years ago. Today, few know more about the ins and outs of the home building business than she does, and we can’t think of any who match her intellectual curiosity and rigor.
- A few steps away from Sarah sits Chester Hawkins, art director for Big Builder and Affordable Housing Finance. Chester does the equivalent of whistling while he works, without whistling, which would get annoying. He’s creative and he gets it done–what more could you ask?
- Down the hallway, we have the Multifamily Executive crew, led by editor Shabnam Mogharabi. In two-plus short years, Shabnam has done for the multifamily community what that rare editor achieves for a business sector–she has become the persona of the industry, asking its tough questions and carefully teasing out the answers. She’s clearly on a trajectory to becoming one of multifamily’s community leaders, which is exciting.
- Just outside Shabnam’s door toils Multifamily senior editor Les Shaver. Les wears his heart–and then some–on his sleave; nobody works, and few play harder than Les.
- Right nearby Shabnam and Les, Scott Crawford–art director for Multifamily Executive and Apartment Finance Today–does his art meets geometry and algebra thing with the pages. He’s good, not only at design but at listening, which makes him better at design.
- Next to Scott, Rachel Z. Azoff writes, edits, traffics, plans, and socially engineers her team to quality and high achievement. Rachel is driven to excellence–nothing ever stops her from getting there.
- Now we need to leave the building, for Multifamily senior editor Chris Wood makes Hanley Wood’s San Francisco office his post. Chris vies for MVP honors on an astonishingly accomplished little team, which makes him very good. He digs. He builds relationships with sources. He’s got ideas. And he always executes on a high level.
- Out there in the San Francisco office alongside Chris, we’ve got Donna Kimura, senior editor for Affordable Housing Finance. Donna is prodigious and fast, and a keen reader of people and personalities. No one is more committed, and no one is so tireless in advocating for her community via insight and information as she.
- Head east from San Francisco as far as Boise, ID, and you’ll be at the nerve center of the group, where Christine Serlin connects the dots of what’s been done and what needs to be done into a picture everybody can understand. Christine leads Affordable Housing Finance, and she manages Big Builder, which says a lot, but it doesn’t say enough about what she does. She makes everybody on her extended family team look better than they are.
- Keep heading east all the way to Maine, which is where the esteemed William F. Gloede plies his trade on Rackliff Island, off the coast of Spruce Head. Gloede is business journalism’s “The Natural.” Analysis–with a few spritzes of opinion–is good hands when it’s posted in Wall St. & Maine, one of the home building industry’s best-kept insight secrets.
- From the Maine coast, head south and “Out East,” to where Apartment Finance Today/Affordable Housing Finance senior editor Jerry Ascierto works out of his home office in Smithtown, NY. Jerry practices the lost-art of financial and business reporting, and does it with an editor’s instinct for filtering wheat from chaff. Jerry is a star, and he’s funny, sometimes intentionally.
- Complete the trip all the way to Orlando. Teresa Burney is one of the best things we know about Mount Dora, Fla., which is near enough to Disney World. Teresa is a pro, and she can really write. Teresa divides time between two masters, Builder and Big Builder, and neither master feels shortchanged, which is her accomplishment.
They’re our peeps. They’re literally the answer to how we survived 2009, and they’re who we’re fully banking on to get us fully on our program for 2010.
So, how does this apply to an achievement in 2009, and what that portends as a 2010 Single Family Housing Megatrend? Well, we feel that the biggest, most luminous story of 2009 had to do with organizations coming out of Chapter 11. In particular, we feel the folks that engineered the Landsource emergence, and the new-lease on life of smaller organizations like Raleigh, N.C.-based St. Lawrence Homes are the stories that bear the profoundest implications for the year ahead in home building.
It’s only the surface of these stories that focuses on finance. Behind and beneath the numbers, there is a truer tale of who home builders are and what they do. Here’s St. Lawrence Homes’ Rich Ohmann describing his firm’s announcement of its imminent return from the clutches of bankruptcy.
The day that the news broke I received a call from Dave Hausfeld, the local Division President from Drees Homes. He said that he had to meet with us and that what he had to talk to us about wouldn’t/couldn’t wait for another day. He claimed that he could only meet us at 4 that afternoon and insisted that he come to our offices. Dave arrived carrying a washtub filled with chilled beer, soda, a bottle of sparkling cider along with some snacks emplazoned with a Drees Homes logo. He presented my brother with a card of congratulations signed by his whole staff in commemoration of the approval of our plan. On Dave’s orders we summoned our team together. We were touched and honored that Dave toasted the first day of the future of the company. To have a tough competitor celebrate your survival exemplifies the familial relationships we all have in our chosen industry. We cheer for each other, we help when we can.
Happy New Year! No doubt, you know and appreciate the value of your team. This team salutes your continued success.
Harvard Joint Center’s Belsky: 1.75 million Annual New Home Units Average in Decade Ahead
Eric Belsky, executive director of Harvard’s Joint Center for Housing Studies, offers this outlook as part of the exclusive series of Web learning sessions at Big Builder Virtual, which is all still available on-demand at your convenience.
JCHS's Eric Belsky
To support a conservative-scenario outlook of demand for 17.5 million new housing unit starts (including single family, multifamily, and manufactured housing placements) between 2010 and 2020, Belsky delves into three principle drivers of demand and stress tests each to derive upper and lower projection assumptions.
- What happens to immigration rates coming out of the downturn?
- When does the Echo Baby Boom generation start impacting household formation and household age distribution?
- Will aging Baby Boomers exert more or less impact on new housing construction in the decade ahead?
Whether housing’s bottom was January and February of the year just ending, or whether we have another leg down to endure, household formation’s next tidal direction will impact residential real estate property values and residential investment right out of the gate of the new decade.
You can access all of Belsky’s visualized data on the Big Builder Virtual event site, but we also wanted to provide a transcript of his forecast so that you can follow the script and draw your own conclusions about what it means for your business.
Here below are Eric’s remarks verbatim:
What happens after the home building storm, the downturn, fully departs? What’s coming next? With things having gotten so bad over the last three or four years, a lot of people are reconsidering what the future may look like and whether what we’re looking at now might be thought of as something approaching a new normal.
Or is where we are now at a really abnormally low point of a very severe cycle?
I’m going to address my comments to that question about what happens to housing demand after this downturn is convincingly behind us.
But I’ll start by talking about where we’re headed in the medium term, and then what will happen when we know that the all-clear sign has been called and the market is moving forward.
As you know this is the worst market downturn that we’ve had in the United States in more than 60 years. You have to go back to the Second World War–when many of the nation’s assets were being redeployed to fight a world war–to find a period of time where housing production was driven as low as it has been in recent years.
Where we are is at or near the bottom of the worst housing downturn that the country’s seen in decades. There’s a lot of sentiment and a lot of reporting that the worst of the home building downturn may be over. There are reasons to believe that the market may have found a bottom. There are indications that the market has begun to turn up from a very low point that we reached in the winter of (January/February) 2009.
The question now is, is this recovery going to be sustainable and will it be vigorous?
While the worst may be over, it’s not 100 percent clear that it is, and there are many downside risks. What we do know is that new home sales and starts are still at their 60 year lows. The September number for new home sales was a very low number of 402,000, which took new home sales back down to June levels.
While these are up from 330,000 approximate new home sales low that was reached over the Winter of 2009, and on a percentage basis is a significant increase, new home sales at a level of 402,000 is an extremely low level. You might say that what we did is we went from being in the basement, and now we’re back into a sub-basement. These new home sales numbers not only are still quite low, but they retreated over the past couple of months back down to a level that we hadn’t seen since June.
So there are signs for hope there, but what we have done is gone back from an extremely low level to just a very low level of new home sales.
One of the brighter spots over the past few months is what’s been going on with home prices. They appear to be stabilizing, or moving up in many or most metropolitan areas. This is that case whether you look at it from the perspective of the Case-Shiller Home Price Index–a broad measure of what’s going on in markets, and includes foreclosure sales–or you focus only on the Federal Housing Finance Agency, which has a number that only affects loans that Fannie Mae or Freddie Mac [underwrite] and the homes that are associated with those, and that’s a much narrower gauge of the market. Both of those are showing signs of stabilizing and improvement over the last several months. This is a very positive sign, because it may indicate that the price correction in many places is starting to run its course.
However, most people feel it’s still too early to call a bottom. Part of the reason is that there’s reason to believe that perhaps there was some relief on home prices falling further as a result of foreclosure and other moratoria that slowed the rate of distressed sales on the market.
Nevertheless, this is clearly a positive signal, and it clearly suggests more likely a real bottoming in housing. Should this begin to unwind over the coming months, it’ll be the beginning of a signal that the recovery is very fragile and may in fact sink back down to some degree.
Housing starts have been rising fairly smartly. They’re up from a low on the single family side of about 360,000, again on an annual run-rate basis in the Winter of 2009. And by September they were up closer to 500,000 annual run rate. This is clearly a substantial improvement, but again, we’re near or at 60 year lows.
So we’re at a very low number overall… although a significant improvement over what many people viewed as a dismal winter, where we got as close to producing no single family housing as many people think we would ever get. That occurred, as you may recall, during a period where all the news was about people not just 200,000 or 300,000 jobs lost but 500,000, 600,000, 700,000 jobs being lost a month. So we had a very frightening set of circumstances in the credit markets that blew up in September of 2008, but were still present with significant effects at that time.
Multifamily housing hasn’t seen the kind of bounce that single family has, and that is another reason for concern. Multifamily housing starts have dropped to extremely low levels, again almost approaching nearly no construction. This is for reasons having to do with rising rental vacancy rates.
So housing starts are rising overall, driven by the single family increase, and there’s some suggestion that the quantity correction may have run its course.
If new home sales don’t show greater strength, and don’t make up for some of the ground that they have lost over the last couple of months, then there will likely be a response on the home builders side, which is to slow production, which is a prudent thing to do but will result in more stress on the broader economy.
But with new home prices still falling, what’s really going on in terms of getting some of home sales is that builders in many places are buying starts. In other words, they are dropping their prices and, in many markets competing with a significant amount of foreclosed property in order to be able to sell their homes. So you have a situation where the median new home price has now fallen to about $200,000 and that’s down from highs of close to $270,000 not long ago.
Until you start seeing signs of the stabilization of new home prices, it’s a little early to call the recovery a done deal.
A final element of where we are is that vacant for-sale housing may have turned the corner. As many will know, one of the hallmarks of this downturn is the extreme levels that homeowner vacancy rates reached. That was associated with a very large increase in the number of units that were vacant and for sale. We’ve started to see modest declines in those homeowner vacancy rates in the South, and the West, and the Mid-West, and to some degree in the Northeast as well.
What’s really behind the recovery at this point appears to be the fact that housing affordability has rebounded in many – you might say most – metropolitan areas. This improvement in housing affordability of course is important because it brings people back into the market. Clearly, even though the increase in new-home sales has been modest, the increase in existing home sales has been significantly stronger, and the share of those sales going to first-time buyers has been higher. And this is because a growing number of people in the United States are recognizing that this is a buying opportunity when prices fall to these levels and interest rates are at these levels.
How affordable metro areas have become, when you factor in both the decline in home prices and the reduction in interest rates over a typical mortgage rate period. When you factor in both interest rates and house prices, in nearly seven out of 10 of the markets we’re looking at here, which are 80 metropolitan areas that the National Association of Realtors has consistent data on from 1989 forward, is that where affordability is is that it’s 10 percent over an average level over 1989 to 2000, which is kind of considered an era in which the markets weren’t overheated.
These are places that are experiencing very strong affordability, and it is bringing buyers back into the market. Then there are still some markets that are above that long term average, but very small shares of metropolitan areas.
What we observe is the importance of interest rates to the reduction in real monthly mortgage costs when someone goes to buy a home. If you instead form a ratio of the median house price to the metro average income of a household what you see is the share that looks very affordable is significantly less.
What this really tells us is that the low interest rates, which have been in and around 5 percent now for a considerable period of time–and these numbers show the situation as of the 2nd quarter–which is about where interest rates are now. These interest rates are critical to making this be a particularly good time to buy in people’s perspectives, even if they believe that prices may fall further if they expect to be in the house for some period of time. This looks like a good time to buy.
Where are we headed then?
There are a number of things that point to the start of a recovery. But there are a number of other factors that suggest that while we’re in a recovery it may not be a particularly robust one. What really underscores how fragile the recovery may be is how heavily dependent the housing market has been on federal intervention. Not just on efforts to stimulate the broader economy but specifically steps taken to try to support the housing market. While a great deal of attention has been on the first-time home buyer tax credit. and the degree to which it’s been an important stimulus to the market, and what will happen when it is no longer available to buyers, … and it has by most estimates, pulled demand forward at a minimum and increased sales in the recent period, the larger, more important factor is the role the federal government has played in insuring that there’s a flow of mortgage credit, and that the mortgage interest rates at which that credit flows is at a low level that creates the kind of affordability conditions we spoke of above.
Also, very significant efforts to modify millions of loans of people who are seriously behind on their mortgages. While those efforts to make loan modifications have fallen short of expectations, and have not been enough to stave off a growing number of foreclosures, they have helped many homeowners and will continue to help in the months ahead.
The real meaningful role is around access to mortgages and mortgage interest rates. This has to do with taking Fannie Mae and Freddie Mac into conservator-ship and increasing FHA loan volume, and also the Federal Reserve buying mortgage backed securities and the corporate debt of Fannie Mae and Freddie Mac to keep mortgage interest rates down.
It’s clear that when you have that level of activity of purchases and they’ve been very significant, that they are very critical to keeping mortgage interest rates low.
Another fact of where we are is that underwriting standards are clearly back. They’re tight, and a number of constraints to people buying homes that people talked about continuously throughout the 1990s are back. Those are things like wealth and income constraints. These are the kind of constraints that are caused by having limits on the amount of your income that you can allocate to debt, and having to come up with money for a down payment. Now you have to have that money for a down payment, and you have to make sure that your income payments for your housing are manageable.
On top of that, and very substantially, low credit score borrowers, borrowers with impaired credit histories are having a very difficult time getting credit. This is at a time when the number of those people who have those problems is up significantly.
Another fact is that multifamily rent is starting to soften in some markets, and multi-family property values are falling. What recovery we’ve seen in the single-family, for-sale market doesn’t appear to be occurring in the multifamily and the rental market.
All this adds up to a potentially muted and very fragile rebound. Not only might there not be a strong rebound, but there’s also a possibility of back-pedaling. We have on top of this very serious delinquencies, and they are causing—as of the 2nd Quarter of 2009—roughly one-and-a-half million homes and slightly more than that to be in foreclosure.
We’re seeing interesting developments in the marketplace that mirror a number of developments that we’ve seen in previous downturns. New homes available for sale always are declining at least two quarters before there’s a peak in months’ supply.
If there are fewer new homes for sale, why isn’t there a concurrent peak in the months’ supply earlier than when it actually peaks. What really drives the peak in the months’ supply is a return—the quarter after it–to an increasing number of new home sales.
So, as is typical, we’re seeing that the inventory of new homes for sale has started to come down, well before there was a peak in months’ supply–and what really caused the peak in months’ supply, therefore, wasn’t an ongoing reduction in the number of new homes for sale, it was an increase in the number of new homes sold. The real dividing line in the peak in months’ supply—before and after—is what is actually going on with new home sales. In every case, you’ve seen new home sales not only turn in the quarter after the peak in the new home months’ supply, but to continue to head higher although not always linearly… sometimes there’s back-pedaling.
New home sales have been on the rise. What you see happening to housing starts is what you see typically when you start to see an increase in new home sales, which is that starts start to increase as well.
All this says that we may very well be in the beginning of a real recovery. But what makes this one more difficult to call is what role the federal government may play moving forward. Also the question that comes up when starts were driven to such a low level, is: is the increase we’re seeing just the market coming back from the brink of the most unfavorable circumstances that hopefully any of us will ever see in our lifetime for new home sales and housing starts at the beginning of 2009, or is this a real bottoming?
The consensus forecast now is for about 700,000 total housing starts in 2010, or higher, but there’s lots of downside risk to that.
Part of the reason for these downside risks still have to do with the issues with the mortgages, and the serious delinquencies and the problems they’re creating.
On the adjustable rate subprime mortgage side, which is the lion’s share of ARMs, serious delinquencies had reached a remarkable 39 percent in the 2nd quarter of 2009, which is coming close to half of all those people who took out those mortgages.
Equally troubling is that fixed-rate mortgages, even prime fixed-rate mortgages have reached a level of about 3.5 percent, which is dramatically higher than the level they typically reach, even in the depths of a recession. And the FHA insurance program, which is very critical now to first-time buyers and to new-home buyers, is up at a level of more than 7.5 percent seriously delinquent.
These are very troubling signs.
What are the keys to the outlook?
Probably the most important key is federal support of mortgage interest rates. Interest rates are about 5 percent now, and would certainly be higher if the Federal Reserve were not purchasing the amount of mortgage back securities from Fannie and Freddie that they have been purchasing.
The success of federal, state, and local efforts to slow foreclosures…. The longer that there’s a steady stream of foreclosures into the market, the more pricing will come under pressure. While prices appear to be moving higher, a significant increase in the number of foreclosures and an inability of government programs to slow them will be a significant drag.
What becomes very critical is whether or not the federal government does more to support housing, whether it extends or expands the tax credit for first-time buyers as long as necessary; what it does after March of 2010, when the theory is the support of purchases of mortgage backed securities will end, and what will happen with FHA? Will it continue to offer the same kind of underwriting terms and standards that it did during the summer and the fall of 2009?
Or will these higher foreclosure and serious delinquency rates cause the federal government to tighten underwriting, requiring buyers to come up with a larger down payment? This could have a very significant negative effect because the wealth constraint is back. The reason FHA volume has increased so much is in part because of the federal guarantee, but the reason it’s increased so much relative to Fannie Mae and Freddie Mac more typical prime loans is that FHA will accept lower down payments than Fannie and Freddie.
Another key to the outlook… when consumer confidence and spending come back and come back convincingly. Consumer confidence fell to remarkably low levels came back off the floor, but are still at levels that would be considered typical for still being at the very bottom of a recession and the bottom of a housing market. You really need to see them spending again to be convinced that this turning into behavior that will keep the economy growing—the key to the economy growing again is for consumer spending to come back.
Another key to the outlook: The speed with which demographic pressures to form households reassert themselves. When you think about what’s going on in the marketplace today many people are delaying forming a household; they’re staying longer with their parents, staying longer living with their roommates, and a non-trivial fraction of households, as a result of foreclosure, have had to make a decision to as to whether they’re going to go immediately back into the rental market, or spend some time getting back on their feet by living with friends and family.
But those kinds of situations, where people are delaying forming households or returning to households while they get back on their feet or they look for work tend to be temporary kinds of situations, and the pressures for people to want to be able to move out, form their own households, and not stay with friends and family through a difficult time as they had hoped to….
When they begin to exert itself you’ll see resurgence of demand for new construction and housing overall.
Another key one will be when immigration comes back into the picture. Immigration is very important to the longer term outlook, and it’s clearly taken a hit as a result of significant job loss in the United States. There are just fewer jobs and so some immigrants who come to the US in anticipation of getting a job, or who know immigrants who are here who are without jobs.
The final key to the outlook: should the broader federal stimulus keep the economy from falling back into recession, it will be very hard for housing not to have a difficult time sustaining its recovery.
What’s going to happen after the storm?
We hope that the recovery that we’re seeing is real, and will be lasting and will be sustainable. Perhaps it will be even more robust than people expect.
At some point, we believe that fundamental factors will take hold in the market. The economy will improve. Mortgage credit will continue to flow. At that point, we’ll move into a period that is not abnormal, but is really the ‘new normal.’
We see that as a much brighter future unless the economy sinks into a deep recession that alters how people form their households and their behavior for doing so over the long run. That’s because demographics very clearly favor very solid levels of production. The amount of production that that will translate into depends not only on assumptions about the level of household growth, but also on the amount of oversupply that we may have entering 2010, the level of immigration we can expect over the next 10 years. Second home, which clearly has been depressed by the current set of circumstances, and the level of losses from the housing stock. Remember for every unit of housing that is lost from the housing stock that had been occupied, a new home has to be built in order to accommodate the household that had been living there.
All these require assumptions as to what they’ll look like moving forward.
It’s important to point out again that today is really abnormal, it’s not the new normal. We’re at or near the bottom and we’re looking up.
Why are we positive still on the demographics despite the fact that we are at or near a bottom, and we do need to look up and look forward to what the future will hold.
The big headship rate changes – the share of people in an age group that form a household, and the higher the number of the headship rate, the more households you get from the same amount of population – really mostly occurred during the period from 1960 to 1980. There have been some changes since then. They were really driven by the increase in female labor force participation which fundamentally changed people’s behavior in forming households in ways that lifted household demand, because you’ve got more households from the same population.
This was women delaying marriage longer; married couples getting divorced and forming two households where there had been one; this was people who’d gotten divorced choosing whether or not to remarry and the rate at which they remarried.
But since roughly 1980, most of those key factors began to subside and the way that people began and continued to form households stayed the same. The key difference was that the foreign born formed households that tended to be larger overall than the native born and minority households forming households differently than majority white households.
If you look at a period from 2003 to 2008, and these are numbers that begin in March of 2008, so you are picking up at least the beginning of the recession… you can see that headship rates by age really barely budged over this period. So when we projected households moving forward, we felt the most sound assumption was for no change in headship rates by age. Although you can see quite clearly here that we do need to make different assumptions about headship rates by age because they vary so dramatically with younger people tending to form fewer households and older people forming far more… what you didn’t need to do was assume that there was going to be some big change in the rate at which people marry and age at which they marry, and the rate at which they divorce, over the next 10 year period.
That’s a fundamental assumption but one that we feel is the proper assumption to be making.
If headship rates aren’t something that we think are going to be a key driver beyond what we would expect, and have some degree of certainty to them, and the age of the adult population that’s already living in the US are already known, so we can project what’ll happen over the next 10 years just by assuming how the population ages and birth and death rates, the really key wild card is immigration.
Why is immigration so critical to what household growth will be moving forward. Over time, and over the last 25 years, the foreign born have been an increasingly large share of total household growth. Were it not be for the increase in the foreign born in the US, household growth would have been much slower.
The challenge around this is that the immigration projections have varied widely. A whole range of different projections have been put out by the Census Bureau over a variety of times, and the JCHS in 2006, which had assumed 1.2 million.
We’re revised those to reflect the Census Bureau’s 2008 projections, and what we did because we are concerned about how robust immigration might be over the next 10 years, especially given the fact that at least some portion of immigration is coming here because of jobs that they anticipate or they have a good reason to believe jobs exist, and there’s going to be a long period of time before we get back to a more full employment situation, you could make the argument that immigration will slow from its recent pace.
So we took both the number that the Census Bureau projects now in 2008, and we took half that number, which is a fairly conservative assumption. For immigration to fall in half would be very unusual absent a significant change in law, but we do think that the economic environment makes it worthwhile running a scenario that would be a low immigration scenario.
What we find when we try using two different immigration assumptions is this: One, that illustrates the 2008 immigration assumptions of the Census Bureau, and the other that assumes half that. What you can see is that, under the half assumption, household growth will come in at about what it did from 2000-to-2008, and above what it came in at an annual average rate from 1995 to 2000.
So even with a fairly dramatic assumption about a significant cut in immigration, which by the way, would mean that immigration would continue at about the pace it seems to have come close to falling to in the last year, when we’re in the depths of this recession, you’ll end up at a number that’s still, by historical standards, a healthy number.
Should immigration rebound and come back to about the level that it was over the last 5, 6, 7 years, you’d end up with household growth that would be just under 1.5 million, as opposed to 1.25 million if you assume immigration falls.
So immigration assumptions really matter. But even under a low immigration assumption you’d still see a significant amount of household growth.
Part of the reason that we expect to see household growth accelerate is that the Echo Baby Boom generation is now reaching adulthood. It’s a very wide and deep generation, and it goes back already more than 20 years. It is a larger generation than even the Baby Boom generation. We expect this to be a clear plus for growth in households; not as large a plus as the Baby Boom generation was in the 1970s even though they were a somewhat smaller generation. Back in the 1970s, a much smaller generation was in the older age group, so you had fewer dissolutions of households, but we do expect it to be a clear plus for household growth.
What this will do is reverse decline in younger households over the next 10 year period. Over the period 1998 to 2008, we actually saw a thinning in the number of households in the prime household-forming and first-time buying age groups. The reason that we saw this decline is that this was the Baby Bust generation, much smaller than the Baby Boom generation it was following. Now, the Echo Boom generation is following behind them, which is a much larger generation than the Baby Bust generation, and as they move into these age groups, they are going to drive increases where we have seen declines.
While the Baby Boomers will drive growth in older households, and the Echo Baby Boom will give life to younger age groups, it really from the perspective of changes in age distribution of the households, the Baby Boomers are still going to be very significant just because of how big they are relative to the generation that was ahead of them.
So you’re going to see really dramatic growth under both our low and high projections in the number of households who are over the age of 65. Obviously, this will have significant consequences for the types of homes that will get built. Although, you will still see an increase in the demand for starter homes because of this reversal from a decline in younger households, to growth.
I want to bring all of this together. What will the future in demand for new housing hold once we get past this stormy weather?
There are three pieces of this demand: One is projected household growth, which is by far the most important component of the demand for new homes; second, is the demand for housing that will come from “net-removals,” and, third is vacant unit demand—the growth in the demand for vacant housing as second-home ownership rates begin to come back, and there’s also a normal vacancy rate in housing stock, as people move in and out of their housing, it isn’t occupied right away, and that creates a certain amount of demand for vacant units. The larger the number of households, the more that are renter households because renter households move more often, the more vacant units that are needed.
We’ve done a lot of work thinking about how to make those assumptions and we’ve put them all together to show that—even under conservative immigration assumptions—long run demand for new housing units should exceed 1.7 million per year in the 2010 to 2020 period. It’s important to point out that this 1.7 million units includes single-family housing completions, multifamily housing completions, and manufactured housing placements; it’s a complete measure of all the new housing that would be placed in the United States.
You can see that under the high immigration assumption, those numbers start to push 20 million over the period.
Now, this assumes that we are going to enter 2010 in a market that’s in balance. But many people believe that the market is still oversupplied. There’s a great deal of disagreement over how much the market may be oversupplied if it’s oversupplied at all. But to sort out how that would affect these projections over the 10 year period, you simply have to subtract from these numbers those numbers that you think are oversupplied.
For example, if you think that the market is a half a million units oversupplied, instead of getting about 1.7 million in units per year or closer to 17 and a half million over the entire period, it’ll come in closer to 17 million. If it’s a million oversupplied, it’ll come in closer to 1.65 million and or 16.5 million over the 10 year period. So people can choose to make the assumptions they want.
In all this, we try to underscore and illustrate that, once we do get past what is clearly a crippling downturn, and we move back into a period that is more normal than what we’ve seen in the past, demographic factors, even if immigration takes a significant hit to where it had been over the last 5 to 10 years, will still be a strong period for housing construction and housing starts.
Life Just Ain’t Fairfield: Apartment Giant Goes BK
The bankruptcy story for Fairfield Residential highlights several issues troubling housing, both single-family for sale and multi-family for sale and for rent:
- land value deflation continues, and continues to trigger covenants, which will perpetuate distress among CRE lenders
- S-F foreclosures are becoming a formidable shadow market competitor to for-rent apartment managers
- private companies’ access to capital remains illogically constrained despite publics’ ability to raise both debt and equity in the public capital markets
- more apaprtment company bankruptcies are likely, especially as downward pressure on rents increases and vacancies increase up to the 8% watermark.
A Virtual “Tyvek” on PCBC for the T&E-Challenged
Attendance being off by nearly 30% didn’t stop the annual Pacific Coast Builder’s Conference in San Francisco from being a vertible hive of activity for denizens of the Moscone Center and environs last week.
If your finance department caps your corporate card, explore the show’s coverage across the Hanley Wood portfolio of titles.
Big Builder editor Sarah Yaussi is a master of the craft of wrap, spinning a highlight guide to some valuable insight and training sessions you can catch on replays and in the archives.
Not to be outdone by the single-family side of housing’s less-is-more equation, Multifamily Executive senior editor Chris Wood carried the torch for the for-rent and condo communities. Here are two from-the-PCBC-trenches reports he filed as well.
- Not Out of the Woods: Multifamily Ponders State of the Industry at PCBC
- Live from PCBC: Q&A with Western National’s Tom Shelton
Like as not, PCBC will be even a bit more modest in 12 months, just before the market recovery gets full traction. But there’s every reason to expect that the show will offer value, whether it’s in-person or in your Twitter, LinkedIn or Facebook user groups.
Harvard Joint Center for Housing Studies Notes Duress
This release today from the Harvard University Joint Center for Housing Studies.
(New York) The worst housing downturn in generations continues to grind on, finds a study released today by the Joint Center for Housing Studies of Harvard University. Despite some stabilization in homebuilding and home sales in the spring, real home prices continued to fall and foreclosures mount in most areas in the first quarter of the 2009. With mortgage interest rates heading higher in June and the economy still contracting, a sustained recovery for housing still faces an uphill climb. “Although there are some signs of improvement or at least steadiness in new construction and sales,” says Nicolas P. Retsinas, Director of the Joint Center, “housing starts stand near 60+ year lows and any life in home sales is coming from distressed foreclosure sales, temporary first-time buyer tax credits, and low interest rates that moved higher in recent weeks.”
Housing demand has withered under the weight of crushing job losses, house price deflation, and tighter credit standards, the report concludes. First-time homebuyers are struggling to meet today’s stricter underwriting guidelines, household growth is well below long-term trends, and immigration has slowed; as a result, the share of homes for sale and vacancies stand at near record levels despite sharp decreases in housing production. “The best that can be said of the market is that house price corrections and steep cuts in housing production are creating the conditions that will lead to an eventual recovery,” remarks Eric S. Belsky, Executive Director of the Joint Center. “For now, markets remain under considerable stress.”
The housing downturn hit low-income minorities especially hard. With unemployment rates sharply higher among minorities, minority households are more likely than others to spend more than half of their incomes on housing. Also, higher shares of minorities live in neighborhoods with elevated foreclosure rates and where house prices fell the most.
Meanwhile, the number and share of households spending more than half their incomes on housing continues to remain at elevated levels. Before the economy began to shed jobs in 2008 and 2009, the number of households with such severe cost burdens, in 2007, stood at 18 million, up from 14 million, in 2001. Although renters are more cost burdened than homeowners, the most rapid growth in households with housing burdens, during the decade, occurred among owners.
Even though present housing challenges are legion—including still soaring foreclosures, millions of homeowners stuck in homes worth less than the amount they owe on their mortgage, and falling rental property values—the State of the Nation’s Housing report concludes that the demographic moorings of future demand remain strong. The largest generation in American history will be reaching young adulthood in record numbers over the next decade. As a result, even under a set of household projections that assume annual immigration falls some 40 percent below the average of the first half of this decade to just half of U.S. Census Bureau immigration projections, household growth from 2010-2020 should still rival the solid performance in the 1995-2005 period. Even if immigration slows considerably, minorities will still account for about three-quarters of household growth.
“With the echo baby boom driving demand for starter homes and apartments and the baby boom powering demand for homes suited to older Americans,” explains Mohsen Mostafavi, Dean of the Harvard University Graduate School of Design, “the design professions will be called upon to deploy new technologies and designs to meet the aesthetic tastes and functional needs of a new, more diverse younger generation on the one hand and a generation in need of home modifications to help them age more safely and healthfully in place on the other.”
Looking beyond the current turmoil, the report underscores the potential to reduce domestic energy consumption by making the existing housing stock more energy efficient and creating dynamic mixed-use communities. Bringing the efficiency of the existing housing stock up to that of homes built since 2000 could save as much as 20 percent of residential energy consumption and more compact urban development could cut vehicle miles traveled substantially. Getting there will be a challenge, cautions the report, because local regulations often discourage compact and mixed use developments. Further incentives may be necessary to get property owners to invest in meaningful energy upgrades.
Multi Talented: News About Us
We’re proud of our colleagues this week.
They’ve toiled long and burnt the midnight oil to bring audiences something bright and new–a sign of their redoubled intent to be the first, best source of insight on the multifamily housing management, economics, and leadership.
Here’s the topline thought on the new multifamilyexecutive.com Web site from the brand’s primary steward, editor-in-chief Shabnam Mogharabi.
But first a look at the fresh new design of mfe.com. Have a visit.
Click image for access to Multifamilyexecutive.com
Here’s how Mogharabi describes the new features and functions.
>> Real-Time Data and Research As mentioned above, our senior editor Les Shaver leveraged MFE’s strong relationships with the industry’s leading research firms to provide something no other multifamily industry publication can offer: Up-to-the-minute, real-time national and regional market research. Throughout the site, you’ll find built-in widgets from Real Capital Analytics, M/PF Yieldstar, and others that provide customizable, searchable data on occupancy and vacancy levels, transaction volumes, rent trends, and more. In addition, the new site features a live stock ticker with continuously updating information on publicly traded multifamily real estate companies.
>> Multimedia-Rich Experience With the re-launch, we are now able to offer enhanced multimedia offerings and interactive features such as slideshows, polls, and Webinars. We also have, through our newly launched MFETV platform, four new videos up on the site, including a 20-minute sit-down interview with Henry Cisneros conducted at the AFT Conference last month.
>> Local and Regional Coverage Since multifamily real estate is very much a local game, it was important for us to be able to have some locally focused content. We were able to modify a Flash-based map created for Remodeling’s Web site and modify it to link to lists of MFE articles about specific markets, both at the local and state level. This was a temporary solution that I think works well for us until we are able to build more targeted local markets pages.
>> MFE Top 50 Rankings Our annual industry benchmark—the list of MFE’s Top 50 Owners, Managers, and Developers—is now viewable in a user-friendly table format that allows for a quick scan to find the company or information needed from any year in which the survey was conducted. And the data can be downloaded into an Excel spreadsheet for easy reference.
>> Daily Exclusive News / Content Aggregation Our vision for MFE.com was to be news-heavy and a destination site for the industry. To do so, we needed to be able to offer folks in the multifamily industry everything they would need in one place. The site is rich with daily Web-exclusive news, features, and stories from MFE, each with its own RSS feed. But in addition to that, we have made a point of offering more aggregated news coverage from around the Web and article feeds than any other publication in the industry. Stories from every industry resource on the Web—including our competitors, national trade associations, and commercial news vehicles such as the Wall Street Journal—can be found on MFE.com. In addition, we offer links to industry blogs, calculators, resource centers, lists, and more.
>> Expert Opinions We have begun to cultivate a blogroll that includes perspectives and opinions from the editors of Multifamily Executive as well as multifamily real estate experts. Over the course of the next few months, we will be bringing together more than a dozen multifamily experts, architects, and consultants to share their insights on the site.
>> Streamlined Design and Navigation With the re-launch of the site, we have updated our color scheme and style. The sleeker, streamlined design allows users to easily locate the right content. And we developed a topic-driven navigation structure that focuses on vital areas of the multifamily real estate business with less of a focus on the magazine product itself.
We congratulate the team that brings you this Site, and we wish them all good luck as they work to bring you the smartest, best, and first intelligence on multifamily housing business and management!
Rental Decay Eases a Bit
There’s about two ways to look at data points that reverse a downward or upward trend. One way is to say, “nyah, nyah, nyah, seasonality’s skewing the number,” and count it as a blip in an otherwise uninterrupted further plummet. That way is for those who are unable to get out of the fetal position.
The other way is to note the ever-so-slight upward hook at the tale end of the vertical deterioration picture, and imagine, if nothing else, you could catch a fish with it… or it could be the beginning of a reversal trend. It might not proceed on an upward trajectory uninterrupted by occasional ups and downs.
The NMHC has released its Tightness data for February, which cobbles vacancy and rent price info into a healthiness index. Calculated Risk has tracked the data and created this analysis.
Click on image for Calculated Risk analysis of NMHC release.
It is common in a recession for apartment vacancies to rise, as households double up by moving in with a friend or family member. However an added factor in this recession is all the single family homes being offered as rentals. This is possible additional competition for apartments:
In a special fifth question to NMHC’s Quarterly Survey, one-third (33 percent) said such competition [from condos and single-family rentals] was unchanged. Another four percent thought there was less competition, and 11 percent don’t consider condos and single-family rentals to be significant competition for apartments in their markets. A slightly majority, 52 percent, did report more competition from condos and single-family rentals than in previous years.
Competition from condos and single-family rentals probably depends on location.
Hedge Clipped
Remember all the economists were saying in 2007 that subprime mortgage woes were contained and wouldn’t spill over into the broader economy?
Reality Bites as Ratings Agencies Downgrade REIT Debt
From MULTIFAMILY EXECUTIVE, by Les Shaver: Single-family sneezes and the world economy, including apartment real estate investment trusts that are assumed to run contracyclical to single-family for-sale trends, get pneumonia. The reason this venue is called Housing Crisis is that the convulsion hits equally both the supply and the demand side of housing, whether you’re talking for-sale or for rent. And it’s hitting not only the balance sheet but also the daily and weekly access to normal working capital, assuming steady cash flow.
There’s an analysis on how tumbling fundamentals and squeezed access to credit have put a pall on REITs’ business and risk outlooks for the next stretch from Multifamily Executive senior editor Les Shaver.
S&P said the ratings were prompted by constrained access to debt and equity capital and concern that the struggling economy will put even greater pressure on cash flow. The agency said “heavy credit revolver usage (in excess of 50 percent), weak debt service coverage, and an over-reliance on earnings from fee-driven and/or asset sales activity are key areas of focus.” It also views the common dividend coverage as a “drawback,” given the need for REITs to preserve liquidity.
“Fundamentals in the multifamily sector are coming under pressure,” says George Skoufis, a director for Standard & Poor’s. “Their debt protection measures are kind of weak. In the previous cycle, they came in with a little bit more of a cushion. Their numbers are a little weaker, and their leverage is a little higher.”
Multifamily and commercial construction lagged the residential for-sale downturn, and many have another leg or two down as employment deteriorates and corporate earnings erode by virture of more conservative money habits among consumers and challenged consumer sentiment. Too, anecdotally anyway, demand for one- and three-bedroom apartments has decline while demand has stayed strong for two-bedroom apartments–an indicator of increased “doubling-up” among people who might choose to live with roommates to weather the downturn.
HUD Taps Carol Galante for Key Multifamily Role
From MULTIFAMILY EXECUTIVE, by Chris Wood: The Department of Housing and Urban Development was a morale morass, and still needs attention internally it probably won’t get until its chief Shaun Donovan chalks up some wins on the foreclosure front… So, we’re talking 12 months minimum.
Click image for access to Multifamily Executive Q&A with Galante.
Every bit of new blood in the department sends a critical message, and clearly, with the hire of BRIDGE Housing Corporation president Carol Galante, Donovan’s playing from strength and resolve to change what has chronically ailed the organization for almost a decade.
Multifamily Executive, which last fall named Galante its executive of the year, assigned senior editor Chris Wood to chat at the end of last week with the new appointee, for her perspective on overseeing $58 billion in development and preservation of privately-owned rental housing as well as a key role in sustainable residential development initiatives.
A Q&A with Galante reveals she intends to serve as an important counterpoint voice to Donovan as priority focus remains on single-family–foreclosures and duress–issues.
There is definitely a role for multifamily, and I think this administration gets that. The administration understands that rejuvenating and refinancing our nation’s multifamily housing stock is critical. Equally important is keeping that housing stock healthy. Greening it, and building more of it in the right places is important as well as economic stimulus.
Read more of Chris Wood’s interview here.