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• Apartments Serve as a Leading Indicator
Watch the apartment market for signs that conditions will be
getting better or worse. Thus far, the news is good. The apartment market is becoming
a more important leading indicator for two reasons:
- As the gap between after-tax homeownership costs and rental costs narrows, buyers
are more likely to purchase a home.
- As long as landlords continue to raise rent and maintain high occupancies, we know
the economy is healthy.
The gap between ownership and renting reached an all-time high
in most markets last year, and is beginning to narrow as rents rise and prices fall.
While we don't have good data on the cost of renting a new condominium versus a
new apartment, we suspect that this differential is narrowing much more quickly
as prices on new condominiums have fallen quite rapidly in many areas over the last
year.
While the rental/homeownership gap appears to be narrowing, the
magnitude of this gap can vary significantly from market to market, and is much
more pronounced in the more expensive markets. The charts below show the stark contrast
between the affordable San Antonio market, where monthly rental rates are currently
72% of the monthly after-tax cost of owning a home, and the more expensive Oakland
market, where the ratio is currently 35%.
While rents have risen, occupancy rates are beginning to stabilize,
which means that landlords may not be able to raise rents very quickly this year.
The reasons: 1) builders stole their most qualified tenants earlier this decade,
and 2) rental condos and homes are providing apartment market competition at the
higher end of the apartment market.
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• Market Recovery Will Vary Dramatically by Region,
April 2007
While the housing downturn has been felt in most markets, the
extent of the downturn and the timing of the recovery will vary dramatically. The
most overpriced or oversupplied markets will correct the hardest, and the strongest
economies will recover the quickest. Interestingly, some of the markets with the
biggest problems also have the best economies. This will create tremendous problems
for those who invested heavily in these markets in 2005 and 2006, and it will create
tremendous opportunities for those who are able make their significant investments
over the next few years.
As shown in our Market Risk Matrix below, several of the major
housing markets in the country are at risk of being both oversupplied and overpriced.
They are New York, Seattle, Orlando, San Antonio, Chicago and Austin. In parentheses
next to each market, however, is the Employment Growth / Building Permit (E/P) ratio,
which generally exceeds 1.0. With a healthy economy, we believe resale price declines
will occur much more slowly than new home price declines, which will continue to
provide a competitive advantage for builders who are competing with the resale market.
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The Market Risk Matrix shows which markets are most at risk of
either:
- Oversupply: Those near an all-time high
construction level are shown at the right, with 75% of peak construction level chosen
by us as the demarcation for high vs. low construction levels.
- Overpricing: Those with high housing cost / income
ratios in comparison to their own historical ratios are shown at the top (5 on the
y-axis is that market's long-term median housing cost / income ratio since 1980,
10 is the most expensive time and 0 as the least expensive time).
Good New Home Demand / Supply Balance: The Employment
Growth / Building Permit (E/P) ratios are shown in parentheses, and metros with
poor demand vs. supply are marked with a red dot on the matrix. In general, regions
with an Employment Growth / Building Permit (E/P) ratio of 1.2 are considered balanced
because there are approximately 1.2 jobs for every household in the United States.
Most areas fall into this definition of a Demand / Supply balance.
A large cluster of markets is still displayed in and near the
top right quadrant, which is most concerning. Builders derive significant volume
from some of these markets, but the market intricacies are not all the same. We
can analyze any of these markets in more detail for you if needed.
Supply-constrained areas that witnessed rapid price appreciation
in the past several years stand out in the top left quadrant as markets with overpricing
concerns. Our long-term outlook for the majority of these markets remains favorable
as long as jobs continue to grow at a strong rate.
The bottom right quadrant shows markets with high levels of supply
that have experienced very low price appreciation either because of poor economic
growth or a plethora of supply. Builders should have very little pricing power in
these markets because supply can easily meet demand.
The lower left quadrant represents markets with a low risk of
oversupply or overpricing. Excluding the inordinate level of permit activity in
Dallas and Fort Worth from 1983 to 1985, current permit levels are relatively high
in comparison to history.
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• Builder Confidence Remains Low, Especially in
the Midwest, March 2007
The NAHB's monthly survey of home building communities trended
down again this month, after increasing over the last several months. The beleaguered
Midwest showed some improvement, but remained that worst region in the country.
The West also improved slightly this month.
Nationally, the Housing Market Index – a measure of builder
confidence through new home sales and traffic in comparison to expectations –
reversed recent trends by falling in March. The national index had been making a
steady comeback in recent months since reaching a 15-year low in September of last
year.
On a regional basis, builder confidence in the Midwest,
which had declined to the lowest level of all regions, is making the strongest comeback.
The West region has only started to turn around this year. The
South and the Northeast are now the highest among
the four regions, but declined in March, dragging down the national average.
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• Speculative Investors and Aggressive Lenders
Create a Surge in Vacant Homes, February 2007
A significant increase in vacant homes in 8 states, including
Florida, Arizona and Nevada, will prolong the housing market recovery in those states
into 2008 or later. The 8 states shown in the map below, as well as the nation's
capital, reported homeowner vacancy rates of 3% or higher in 2006, showing significant
overlap with the areas where investor buying and/or foreclosure rates were the highest.
Only one state had a homeowner vacancy rate above 3% in 2005.
The homeowner vacancy rate - the proportion of the homeowner
inventory which is vacant for sale - averaged 2.4% nationally in 2006, rising as
high as 2.7% in the fourth quarter.
Investors putting their properties up for sale led to increased
vacancy rates in Florida, Arizona and Washington, D.C. In Colorado, Michigan and
Georgia, where foreclosure activity is high, vacancy rates also worsened. Nevada,
which ranks near the top of the list in both foreclosures and investor activity,
reported a vacancy rate of 3%, and was the only state to report a rate of 3% or
above in 2005.
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2006 Homeowner Vacancy |
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2005 Homeowner Vacancy |
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• Affordability Affects Population Growth, Migration
Trends, January 2007
People are leaving the California coasts and the Northeast at
a faster rate than prior years, primarily because of housing affordability. The
high cost of housing is slowing population growth in many coastal markets, and migration
trends suggest that more people are moving to markets where affordability is better.
In Southern California, the coastal markets of Los Angeles and
Orange County are reporting an actual decline in the adult population, and San Diego
had only a slight increase. Oregon, Arizona, Nevada and Utah are the beneficiaries.
Even Florida's migration has slowed because of housing affordability.
An annual migration study conducted by United Van Lines shows that the Southeast
states with the highest rate of inbound moves are North and South Carolina, Alabama,
and Tennessee, where home prices are still relatively affordable compared to their
own histories.
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• Your Local Apartment Market Gets Its Turn, December
2006
Almost every market in the country has a very healthy economy
with a record level of employed people who own or want to own a home. There are
more than 145 million employed people in the United States, with an incredibly low
4.5% unemployment rate. This sounds like ideal conditions for the housing market,
yet we all know the market is mired in a slump.
As we look around the country, only the agricultural economies
and a few others have unemployment rates above 6%. Low unemployment rates are a
very positive indicator of strong housing demand.
Over the last several years, falling interest rates and creative
financing options created up to 2 million more homeowners today than we would have
expected, raising the homeownership rate to a level we would have expected several
years from now. There are actually fewer renters in the United States today than
there were in 2001.
Although the demographics for ownership are fantastic, the housing
industry is due for a correction as this is the time in the cycle when landlords
get to raise rents. Rent increases will gradually provide additional incentives
for renters to become homeowners, and the for-sale housing industry will flourish.
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• Minneapolis-St.
Paul, MN, November 2006
Most of the housing markets in the country are slowing because
interest rate increases have impacted all markets. Some level of speculative investor
activity existed almost everywhere as well. The Minneapolis market is cooling in
more ways than it usually does this time of year.
The Minneapolis Twin Cities metro area economy is very strong,
with more than 35,000 payroll jobs created over the last year, which is a 2.0% growth
rate. Nearly one-third of the job creation was in the high-paying Professional and
Business services sector, and the unemployment rate is only 3.6%. The 13-county
metropolitan area is home to nearly 3 million residents and many Fortune 500 companies
such as Target, PepsiAmericas and 3M all call Minneapolis-St. Paul home.
Downtown Minneapolis, built predominately in the early 1900s,
is experiencing a surge in new condominium construction, with warehouses being converted
into lofts. With all the new downtown construction, it is possible that the urban
core population could double by 2010. Still, commuters greatly outnumber the number
of people living downtown.
The Minneapolis housing market, which is the 18th-largest housing
market in the country (based on single-family permits), isn't faring as well as
the economy. Single-family permits have declined 22% from this time one year ago,
and builders are reporting sluggish sales activity. The reason: Affordability. Our
Housing Cycle Barometer rating for Minneapolis is currently 6.0, making affordability
in this market above both its historical median and many other Midwestern markets.
The rise in mortgage rates, combined with rising listings, has converted this seller's
market into a buyer's market, where qualified buyers are difficult to find and have
plenty of options. We believe that prices will go through an adjustment period until
the number of listings returns to a healthy level (3 months of sales volume). As
long as the economy continues to grow, and barring some other external shock, this
adjustment period should take less than one year.
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• Chicago, IL
August 2006
The eight-county Chicago metro area ranks seventh in the nation in single-family
permit activity and fifth in total permits. Total permits have doubled in the last
15 years to nearly 47,000 permits per year.
The economy in Chicago is recovering nicely from four years of
job losses that ended in 2004. Chicago employers have added more than 44,000 payroll
jobs in the last 12 months - 31,000 of which have occurred in the high-paying Professional
and Business Services sector. With a ratio of employment growth to permits of approximately
0.94, housing demand and supply are almost back in balance.
Despite improving economic conditions, the housing market in
Chicago is slowing. Chicago has been one of the better-performing large markets
in the Midwest, but with new home cancellations reportedly as high as 50% and new-home
sales this summer down 25% from one year ago, recent softness is driven largely
by rising interest rates and the exodus of speculative investors. Inventory on the
resale market is certainly a factor: real estate agents are reporting inventories
have increased 30-40% in some parts of the Chicago metro.
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• Austin, TX May
2006
The Austin market has all that is needed for a bright future:
- an excellent employment base of highly educated people (Dell Computers, University
of Texas, etc.),
- a 7-year-old, $581 million airport that has plenty of room for growth,
- a great location in the center of the country, and
- fantastic infrastructure.
In 2000, just as Austin was completing the infrastructure necessary
to open massive areas of land in the northeast for development, the technology downturn
hit. The result was that, from 2001 – 2003, Austin lost 20,000 jobs while
builders completed more than 50,000 housing units. Certainly, the market suffered
greatly during this time. Recently, job growth has returned, but price appreciation
has been slow because there remains a hangover of foreclosure activity from the
downturn. Home prices have risen only $17,000 in the last 6 years, while mortgage
rates fell from 8.3% to 6.3%. Thus, Austin is one of the most affordable housing
markets in the country.
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• Salt Lake,
UT, April 2006
Salt Lake is an anomaly. It is a market that frequently looks
good on paper. Many have entered the market, only to exit it a few years later.
Local builders and some large private builders, however, have had tremendous success
in Salt Lake.
This is a market where local knowledge appears to be a key advantage.
Fractured land ownership, cost advantages based on a long history with the local
subcontractors, and intimate knowledge of the consumers are just some of the reasons
that the locals claim that outsiders have failed.
After suffering job losses in 2003 and 2004, employment growth
has rebounded, with 25,600 jobs added in the last 12 months. Approximately 7,800
of those jobs have occurred in the high-paying professional and business services
sector. With just 8,720 permits issued over the same time, this translates to a
very strong opportunity for growth in the Salt Lake market.
Salt Lake is currently very affordable, as measured by our Housing
Cycle Barometer rating of 1.5. The median resale home price in Salt Lake is $176,375,
three times the median income.
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• San Diego,
CA, March 2006
San Diego's housing market is poised for a soft landing later
this year. On the surface, it looks healthy, but below the surface the story is
a little different.
- Job Growth: Job growth is strong, but the jobs are low-paying.
The growth in high-paying Financial Activities, Information and Professional &
Business Services jobs is anemic, while the low-paying job growth is strong.
- Permits: Permit activity is less than job growth, which
is usually a proxy for a healthy market. However, the permit levels are much higher
than many years ago due to a surge in supply in three submarkets. Most of this supply
is high-priced homes on small lots.
- Condo Conversions: Condo conversions, which are not tracked
by government agencies (they are not included in the permit numbers), have saturated
the low end of the market.
- Speculators: Speculators, particularly in the high-rises,
have come and are now leaving.
- Affordability: With the median resale home price in San
Diego exceeding $500,000, much of which was driven by speculative home buying, the
prospect of homeownership is still out of reach for many.
Conclusion: Conversions will subside,
speculators will leave, builders will find the price where they can achieve the
desired sales rates, and the market will return to normal. Many of the 25,000 new
employees this year will buy the homes that are for sale and conditions will return
to normal. San Diego is still one of the most desirable places to live on the planet.
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• San
Antonio, TX, February 2006
With more than 22,000 permits issued in the last year, San Antonio
is a large housing market that receives very little attention. San Antonio is now
the 19th largest housing market in the country.
Here are just some of the great reasons why San Antonio has been
so successful:
- Affordability: With a median detached resale home price
of $138,900, we calculate that more than 50% of households can afford the median-priced
home.
- Pro-Business: A pro-business environment that was kick-started
many years ago by former Mayor Henry Cisneros has been very successful adding military
employment and landing major employers, such as Toyota.
- Location: As the closest major metropolitan area to Monterey
Mexico, San Antonio benefits significantly from NAFTA trade. The beautiful Texas
Hill Country is also only a short drive away.
San Antonio, however, is a highly competitive new home market.
First of all, most of the large public builders have a huge presence in San Antonio.
Secondly, San Antonio is home to "The Rayco Model," which is a cost-efficient building
process that was developed by Rayco Homes, and has reportedly been studied and copied
by builders all over the country. Rayco was purchased by KB Home in 1996. Put simply,
successful home builders in San Antonio cannot afford to make mistakes.
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• Fort Myers,
FL, January 2006
The 11th largest housing market in the country receives almost
no attention in the press, but that will change soon. In the last three years, the
number of building permits issued in Lee County (Fort Myers, Florida MSA) has almost
tripled, to 29,382 permits issued over the least 12 months. That level is only 6,400
fewer permits than were issued in Orlando and nearly equal to the number of permits
issued in the entire 15-county Washington D.C. metro area. At its current rate of
growth, Fort Myers will exceed the almost 35,000 annual permits issued in Tampa
and Orlando in 2006.
Last week, I spent a day in Fort Myers trying to determine what
was driving the growth. My quick conclusion: retirement housing, second homes, and
investor activity - mostly from the Midwest. While the demographics for these three
types of housing demand are strong, they don't explain a sustainable 18,000-unit
per year surge in building permits. In the short term, this market is probably overbuilt,
which will result in more competitive market conditions later this year. In the
long-term, Fort Myers will be a great market because of the high number of retirees
who will relocate to Florida and find Fort Myers more affordable than nearby Naples
and Sarasota.
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• Houston, TX,
December 2005
Houston has risen from the dead (in 1987) to the 3rd largest
housing market in the country today. Almost 61,000 building permits have been issued
in Houston in the last 12 months. At its current rate of growth, Houston could pass
Phoenix as the 2nd largest housing market in the country sometime in 2007.
Houston has always been known for its pro-growth, pro-developer
attitudes, which has lead to periods of overbuilding in the past. We were concerned
about potential overbuilding in Houston until the terrible tragedy of Hurricane
Katrina hit New Orleans several months ago. Now, with tens of thousands of New Orleans
refugees finding employment and housing in Houston, we believe the demand for housing
is surging and will continue to surge for the foreseeable future.
Houston's pro-developer attitude has helped contribute to maintaining
housing affordability. At $141,000 for the median-priced home, Houston has a tremendous
competitive advantage with respect to attracting employers and employees to the
area.
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• Jobs Drive Housing Demand, November 2005
During the holiday season, the question always arises: Is this
the normal home building seasonal slowdown, or is it worse? We believe it is worse
- much worse - due primarily to the surge in mortgage rates experienced over the
last 7 weeks.
This doesn't mean that 2006 will be the catastrophe that a few
economists and reporters have been projecting since 2001. Markets where job growth
exceeds the number of homes built should perform far better in 2006 than markets
whose housing supply will exceed housing demand. Right now, the economies that depend
on the real estate, automobile and airline industries face a more difficult future
than other markets. This morning's announcement of 30,000 layoffs at GM, following
closely on the heels of last week's announcement of a 10% workforce reduction at
Ameriquest (one of the largest mortgage companies in the country) emphasize that
all sectors of the economy are not performing well.
We are currently working on our individual market forecasts for
2006, which will be available for purchase (along with complete job, permit and
affordability historical information) for $250 per market next month. In the meantime,
we suggest that you monitor your local market's Employment Growth / Building permit
ratio (E/P ratio). While both figures in the ratio are subject to future revision
because they are based on samples, they are the best short-term indicators of a
housing Demand / Supply ratio. The strongest E/P ratios in the country are shown
below, and each month we update the data for you to calculate the ratio at
http://www.realestateconsulting.com/metro_statistics.htm.
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12-Month
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12-Month
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Employment
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Total
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Emploment /
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Growth
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Permits
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Permit Ratio
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1
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Fort Lauderdale, FL
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29,100
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6,575
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4.4
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2
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Orange County, CA
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27,700
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8,156
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3.4
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3
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Camden, NJ
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14,900
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5,221
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2.9
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4
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Bethesda, MD
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13,000
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5,807
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2.2
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