June 20/27, 2016; Volume 30, Number 26
By Mark Boud
Businesses that are dependent on the health of the new home construction market, the real estate industry and consumer spending overall require solid, quantitative information and intelligent forecasting to position themselves to take advantage of potential growth opportunities. In this Q2 2016 Residential Economic Report, we provide a summary that will enable readers to quickly understand both the opportunities and challenges in the housing market and provide insight on various key economic indicators.
A key market indicator is employment, specifically job creation. Currently, 2.8 jobs are being created for every house built in the United States. More importantly, the current jobs-to-housing ratio is far higher than the long-term equilibrium level of 1.06 jobs-to-1.0 homes. Research shows housing demand is growing more than 2.5 times the rate of housing supply, resulting in the rapid depletion of distressed housing and continued positive price pressures.
By the end of 2016, we expect the U.S. housing market will be 1.3% under built. And by 2018, under supply is expected to reach 2.7%, or 3.73 million homes. Despite strong price appreciation in most markets during the past 24 months, undervaluation of housing is still evident in many markets due to a continuation of record low mortgage costs and increasing household incomes.
With 2.8 million jobs created during the past 12 months, the economic expansion continues to fuel strong demand for new housing. Job growth is forecast to remain strong throughout 2016 and remain positive through 2021, although some softening is expected.
Statistics show virtually all sectors of the U.S. economy grew during the past 12 months, with the exception of mining and manufacturing. Growth has been especially robust in education and healthcare, professional and business services, trade, leisure and construction. The public sector—typically the last job category to recover—is now adding jobs, contributing to what has largely been a private-sector economic recovery. Conversely, tumbling oil prices have had a negative impact on the petroleum industry.
One drag on economic growth is the plight of the small private homebuilder sector, which has been slow to recover. During recessionary years, many of these builders were wiped out. The result is an increasing monopoly of larger public builders and somewhat restricted housing supply nationwide.
Another metric that bears watching is under/overvaluation of the housing market, which is determined via an examination of current mortgage cost-to-household income ratios relative to the long-term norm. Based on these relationships, housing in the United States is expected to become overvalued by 2017, with the potential to become dangerously overvalued by 2019 if current trends persist. Affordability relative to the economy will need to be monitored carefully—at least on a quarterly basis—to understand the best land buy/sell and development decisions across the country.
Based upon the most recent economic, socio-economic and demographic conditions and forecasts for the United States, we expect to see stable to strong land purchase and housing development opportunities. Careful quarterly monitoring of affordability issues will be crucial in the planning and development of housing sites throughout the nation.
For more on this report, visit realestateeconomics.com
Mark Boud is senior vice president of Metrostudy, which compiles comprehensive quarterly information on the U.S. housing market. He will be a speaker at The International Surface Event (TISE) on Tuesday, Jan. 17, 2017, from 9 a.m. to 10:30 a.m.