Economy Contracts in First Quarter
Oceanside, CA – Many economists consider a vibrant housing market as the springboard towards sustained economic growth. Given that First Quarter GDP was revised downward to a (2.9)% annual rate, it’s a great time to ask: what is the outlook for housing and the trade show industry? Opinions vary among analysts and the Trade Show Executive Exposition Forecasting Board, but overall, the exposition industry is on solid footing.
The housing industry, however, is sending mixed signals. “Although the housing sector has been recovering since the end of the recession, activity appears muted so far this year,” said Frank Chow, chief economist for Trade Show Executive Media Group. He pointed out that new and existing home sales declined in the first three months of 2014, but rebounded sharply in April. And while housing starts have risen 9.4% in the past 12 months, Chow noted that the momentum has slowed since the end of the Fourth Quarter, with the latest report showing a decline of (6.5)% in May. Building permits were down significantly in May. “Analysts blame the weather, but it is more complicated than that,” Chow said. Home sales began slowing in mid-2013 amid rising prices.
Housing gains have been modest but steady in the past few years, but in terms of the national economy, Chow said housing is far from pulling its economic weight. In the Fourth Quarter, residential investment accounted for only 3.1% of GDP, less than half the peak of 6.6% in 2006, in a report by Capital Economics.
If building activity returned to its post-WWII average proportion, GDP growth would jump in 2014 to a booming 4%, adding 1.5 million jobs and cutting a percentage point off the unemployment rate. So, what’s holding the housing market back? “The answer I believe is interwoven with the jobs market, demographics, and Fed policy,” said Chow. He noted:
- Home sales in the top 1% price range are booming while the other 99% is flat to declining.
- The job market and wage gains are stagnant for most households.
- Higher home prices and interest rates are outstripping affordability.
- Millennials are choosing to rent or live with their parents longer.
- Demand from big investment firms is waning.
- Credit conditions are better, but still tight.
The Rich Get Richer
Chow said the same forces impacting the job and asset markets are driving the housing situation. According to the National Association of Realtors, the median price of an existing home gained 11.5% last year, second only to the 12% increase in 2005, and will probably slow to 5.6% this year. “However, looking at the national average can be deceiving,” Chow said. Online real estate broker Redfin reports the trend for the top 1% of U.S. home sales is up 21% through April, while the lower 99% have dropped (7.6)%. This diverging trend is striking and has been developing over the past two years, Chow pointed out. Specifically, in 2013, sales of the 1% priciest homes jumped 35.7%, while the other 99% rose 10.1%. In 2012, sales of top 1% rose 17.5%, while the rest of the market inched up a mere 2.9%.
Affluent buyers are feeling bullish due to soaring income and wealth gains during the past three years, Chow said. High net worth buyers continue to look at luxury real estate investments to diversify their portfolios. Many economists believe the Fed’s policy of nearly free and unlimited amounts of capital for those with access have created enormous wealth in a min-uscule part of the population by inflating financial assets, nearly 50% of which are owned by the top 1% of households and more than 80% by the upper 10%.
Squeezed in the Middle
Meanwhile, the middle of the market has been suffering from relatively tighter credit and stagnant wages, so there isn’t enough income to drive more sales. The median U.S. household income rose less than 1% in 2013, according to Sentier Research LLC. In April, the median income (adjusted for inflation), was (4.2)% lower than in June 2009, the beginning of the recovery, said Gordon Green, a Sentier partner. “Even though we’re technically in a recovery, household income is lower now than it was in the recession,” Green said. “It makes it a lot harder to buy a house.”
Large investment firms like Blackstone Group and American Homes 4 Rent have swooped in to buy low-priced homes to convert into rentals and have dominated the lower-end of the housing market. Such investors raised about $20 billion to purchase as many as 200,000 properties in the past two years. This year, investors’ purchases have cooled, accounting for only 17% of homes purchased in March. Meanwhile, the share of Americans who own their homes was 64.8% in the First Quarter — the lowest since Second Quarter of 1995, Chow pointed out.
A Decline in New Households
Another aspect holding back housing is generational forces. Young people are choosing to remain at home longer than previous generations. Before the recession, 27% of the 18-to-34-year-olds lived with parents. Now that share is 31%.
“That is surely attributable to the lingering effects of a downturn that struck young adults particularly hard,” said Chow. Stuart Miller, CEO of Lennar Corporation, one of the nation’s largest homebuilders, believes the millennials will eventually form their own households, but is unsure how long before it happens. “Right now, we’re trending to about a million housing starts per year,” Miller said. “Normalized housing is somewhere around 1.5 million.” On the other hand, most baby boomers are staying put. Analysts have predicted boomers will sell their existing homes and buy condos or smaller homes. The recession and tepid recovery seems to have stalled this. Though the nation’s population has grown by about 20 million since the housing downturn in 2006, the number of households established annually has declined dramatically since 2007. Jed Kolko, chief economist at real estate information company Trulia, estimated a shortfall of 2.3 million of these “missing” households in 2013.
Multi-Family Homes Short-Change the Job Market
Finally, a little noticed boom is underway in the nation’s housing market — just not for single-family homes. Construction of multi-family rental properties was higher last year than even at the peak of the housing boom. Some 34% of all housing permits issued nationwide were for multi-family properties in 2012 and 2013, the highest since 1984. It appears many people who once set their sights on buying a house are now deciding to rent. While renting may make sense given the fallout from the recession, it does less to support the overall economy. Moody’s Analytics estimates every housing start for a single-family creates 3.7 jobs over the ensuing year, compared with 1.8 jobs for each multi-family home.
A Robust Housing Market is Years Away
Now that we have a better understanding of why it’s been so difficult for housing to recover, what can we expect for the near future? Here’s four forecasts that signal a more robust housing recovery is likely a couple of years away:
- U.S. house price increases will slow more over the next two years, curbed by tight lending standards, slow wage growth and lack of first-time buyers, a Reuters poll found. The analysts polled did not expect any major pickup in housing activity.
- Lawrence Yun, chief economist for the National Association of Realtors, projects sales will decline 2% this year. “Housing is a victim of its own success,” he says. “The fast price growth is not healthy.”
- The Mortgage Bankers Association in June lowered its forecast for combined new and existing home sales in 2014 to 5.28 million — a decline of (4.1)% and the first annual drop in four years.
- The share of Americans planning to buy a home in the next six months plunged to 4.9% in May from 7.4% at the end of 2013, according to The Conference Board.
Despite the dour forecasts, the jobs market brings a glimmer of hope for housing. The U.S. added 217,000 jobs in May — the fourth consecutive month of more than 200,000 jobs created — suggesting sustained momentum in labor markets. The economy has now recovered all of the 8.7 million jobs lost during the recession, Chow pointed out. Interest rates have surprisingly fallen recently in spite of the Fed’s cont properties under water dropped by half since 2009. More than 3.5 million homes regained equity over the past year. “Now if the government will relax home lending standards and the private sector can generate better income growth, then maybe our wait for a robust housing recovery will be shorter,” Chow said.
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