NAREE Mid Year Economic Forecast: Blame It All on Rising Rents

Writing this while listening to the economics panel, so bear with me on any boo boos. The biggest takeaway from the panel of distinguished economists was how rising rents are forcing millennials into the housing market, but could also be hurting us/them and creating inflation that will ultimately lead to higher interest rates:

Lawrence Yun, chief economist at the NAR, says low 30 year interest rates are being assisted by lack of inflation and low gas prices. But come November, those “gas benefits” might end. (Midland Odessa, take note.) Rising rents, a huge red flag all four experts agreed, might push inflation up about 3% by the end of this year or early next. That in turn could push interest rates up. Yun predicts a rate hike in the federal funds in Oct. of 2015.

Rising interest rates is always a negative for home buyers. Sustained rising rates will hurt home sales. Some good news: look for credit boxes to open with a loosening on FICO credit scores, and lower down payment products coming from Freddie and Fannie (might help FTHB). By the end of 2015 the FHA might even have a positive balance sheet (far fewer defaults) with more room for a premium rate deduction next year.

We had a bubble, a crash and a steady recovery. Sales of newly constructed homes are a much smaller segment of the market. Existing home sales are up, monthly pending sales are up, and as a result home prices could touch a new high this year.

Trends: Price appreciation is on the way up, because housing inventory historically low. We are experiencing the lowest home inventory in 30 years! Takes about 3 month to sell a spec home on average (faster than that in North Texas). Good news is that household net worth and the stock market are at an all time high.

Is there a price bubble? Housing prices are reaching 2006 levels. But this time there is more income to support higher prices.  The lack of housing supply today yields tighter credit and more cash sales. Proof: 5.3 million existing homes sales in 2014 verses 7.2 million in 2006.

Possible bubble markets: San Francisco and Miami.

Yun’s forecast: low recession risk, home sales rising meaningfully this and next year, housing starts improving thanks to smaller/local lenders providing loans to builders.

David Crowe National Association of Home Builders: We are over healed in terms of multi-family. Things are getting better for home builders… builder’s sentiment following single family growth. But the shift in sales has gone to existing inventory, not new construction. Example: in normal times, 14% of existing home sellers buy a new house. Now only 9% are buying.

What’s the problem? The supply chains have been interrupted. Home builders say they cannot get enough lots to build houses, cannot get enough labor to build them and supply material prices are going up. Five years ago builders were not able to borrow from small community banks. The choking of the financial pipeline really hurt builders. Builders are seeing a profit squeeze. They are paying more for land, labor, and materials (somewhat) and suffering from no or very expensive credit.

There has been a modest increase in single family home starts, because the first time homebuyer is (slowly) returning. FTHB incomes are drifting up, and millennials out of the box are seeing/feeling these rent increases so now home ownership looks mighty attractive. We’ll see a leveling off in multi-family construction (FINALLY!) as the first time home buyer peels off.

CoreLogic: Frank Nothaft. Home sales are up 5%, to the highest levels since 2007. Consumer confidence is at the highest levels in years, so they are more likely to buy big ticket items.

We have lean inventory plus demand: housing prices will be up by 5% for the next 12 months. By end of 2017 they should be at 2006 levels/peak. Over the last 3 years, the inventory for home sales has been at the leanest in the last 30 years.

Why is inventory so lean? New home starts are still very depressed — and folks with low interest rates don’t want to lose them. Millions of homeowners refinanced below 3%. We may not believe this in North Texas, but 5 million homeowners are still under water on their homes, or 10.2% of homeowners.

Headwinds: negative equity. Student debt on young households. Tight underwriting standards continue to plague… tighter than 2006, yes, but tighter even than in 2000.

Rental market, crouching tiger: 3 million or 1/3rd of the US housing stock has moved to single family rentals. Single family homes now represent 40% of the rental stock in the US. No surprise: Dallas is one of the top markets for single family rental homes. There is strong demand for these homes, which pushes up rents:  single family rents have gone up 4% nationally. Look for double digit increases in single fam home values in hot markets.

Stan Humphries: the rent is too damn high.

We are in the midst of an historical rental crisis. A third of us are renters in America. Today’s renters are tomorrow’s buyers.

Household formation rates are so low, they are a quarter of historical rates through recession. But a recovery is coming. For almost a decade all the households we have been forming have been renting households. Rental demand is burgeoning from-

foreclosures

millennials (unemployment, student debt)

rental vacancies lowest they’ve been post bubble

This tight supply is leading to rents rising faster than home prices. May data: rents up 4.3% year to year, homes up just 3%. Rents can increase as long as salaries keep up. And we are not just talking the Bay area: rents have risen 10% in Kansas City! Comparing the balance sheets of families who rent versus those who own, we are spending a lot less of our incomes on single fam home mortgages (thanks to low interest rates), but that’s not true on rents. Median family income puts out 30% to lease. Better balanced number would be 25%.

Moderator Steve Brown made a joke that has a ring of truth: maybe apartment communities should hand out free dentist visits to tenants?

What gives when rent is too high? Household budgets squeeze out other spending… like on health care. Visits to the dentist and doctors (even the gynecologist!) are first to go. Other coping strategies: 32% of US households now doubling up (versus 27% in 2006) either moving in with the fam or sharing an apartment.

There has  been a multi decade high on multi family construction. Don’t we know it.

But! Listen here — millennials do want to buy & own homes…  they are more like more like Silent Generation. They cannot afford down payments, want less house.

The lack of inventory is creating reluctance among existing homeowners to sell —where will they move?

Also, when you are locekd into a cheap mortgage rate, who wants to move?

Still a million homeowners out there with negative equity.

Pity the homebuilder: tight credit plus expensive land forces builders to build higher priced homes.

Slight veer to the commercial market: we are seeing repurposing of dead malls for college campuses, medical suites or even distribution centers. Or mixed multi-use, like Midtown.

Someone asked about the poor multi-family stepchild, Condos. Yun said the long term trend looks good, really good, as aging boomers shift from single family homes to condos with less maintenance. What has hurt condos is financing — really held back, cannot get it especially when a majority of the units are being leased. Also construction defect law and lawsuits REALLY hurting the condos: as the buildings are transferred from the developers to the HOAs, maintenance is deferred and the HOA sues the developer. (One developer at the conference yesterday said this is built into the cost of the units — hence adios affordable condos.)

Only 5% to 8% of multi fam construction today is condos.

Oil: Midland Odessa home values saw a significant increase in housing prices over last few years which could be hurt/create a weakness in housing MO values if low energy prices are sustained.

Apodments anybody? The choice any homebuyer with a tight budget has is to either move farther out (where land is cheaper) to find more affordable housing, or live in smaller square footage closer in. But some municipalities are fussing over having micro units as neighbors. Certainly we have seen this in Preston Center where neighbors wanted minimum square footage requirements and less height/density for the proposed Transwestern project. In Seattle and Washington, D.C. property owners are fuming and fighting to keep these “solutions to affordable housing” out of their ‘hoods. They are a bad fit, they say, for several reasons: in areas with a lack of transit, they increase traffic and parking demand and could potentially flood schools with more students. Neighbors want more input on these apodments — 140 to 220 square feet in size — fearing negative influence on property values:

There’s no valve controlling how many of these there are,” he (Ed Cummings) says. “They should have a set of indicated and non-indicated conditions, public notice and a public comment period. I own a multifamily property myself,” he says. “Apparently I could go from four to 24 units, and tough luck on my neighbors.”

Those shrinking digs do make politicos and aggressive guerrilla urbanists (Get rid of cars! Get rid of highways! The suburbs are the enemy!) ecstatic, some neighbors, “even those who support the idea of density”, aren’t thrilled:

One objection is that here in Seattle, unlike in San Francisco or New York, the process of creating code to allow such buildings isn’t currently up for review—it’s old code. So micro-apartments pop up, sometimes with little warning, in places where neighbors have been expecting traditional four- to six-unit buildings. With micro-apartments, “unit” is likely redefined to mean an entire floor of eight tiny apartments with locking doors and bathrooms, plus one kitchen and one common area.

Yep, it’s those rising rent prices causing all our woes, even the mosquito bites!