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2019 HOUSING OUTLOOK 7 economists predict market trends

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FEATURED ARTICLE: 2019 HOUSING OUTLOOK

What will be the most important housing

market trend(s) in 2019 and why? 1

“Rents and house prices continue to rise strongly, outpacing income gains, creating increasingly serious affordability problems for lower- and middle-income households.”

U.S. HOME AFFORDABILITY TRENDS

PCT OF AVERAGE WAGES TO BUY MEDIAN-PRICED HOME

AVG 30-YEAR FIXED MORTGAGE RATE

60.0%

8.00%

ZANDI: The lack of affordable housing units. Construction of new homes for ownership and rental for lower- and middle-income households has significantly lagged demand. Va- cancy for these homes is very low and continues to decline, as builders have been slow to increase construction of affordable homes. There are a number of pernicious constraints on builders, including a lack of available labor, tight construction financing, high permitting costs, and the high cost of construction materials which is being exacerbated by the escalating trade war with China. Rents and house prices continue to rise strongly, outpacing income gains, creating increasingly serious affordabil- ity problems for lower- and middle-in- come households. “Continued increases in rates will see further weakening in these key housing measures while stabilization or a fall in rates could breathe new life into the market.”

MARK ZANDI

7.00%

50.0%

(Fixed Rate Mortgage) in 2018, and the housing market had a tough time adjusting. Home sales sagged, housing construction stalled, and home price appreciation moderated in response to higher mortgage rates. If economic growth remains solid, look for rates to gradually tick higher in 2019. Will the housing market absorb those higher rates and resume mod- est growth? I think so, but we’ll have to watch closely. KAPFIDZE: The path of interest rates will continue to dominate the housing market in 2019. The 150 bps increase in rates since 2016 has lowered affordability, which has had the follow-on effects on the housing market that we are experiencing. The slowdown in both sales and prices are a direct result of the increasing “Home sales and broader economic activity could slow more substantially in a handful of regional markets — primarily in the least affordable parts of the country — but it will pick up in more affordable areas.”

much more stable. Swings in real estate means home prices stalling for a while after 50 percent gain cumu- latively over, say, 70 straight months, though brought on by slowing home sales. Once prices slow to a crawl, the buyers will likely resume back into the market. All-in-all, no meaningful change to home sales or to home prices in 2019. That’s quite boring. TERRAZAS: Home sales and home value growth will slow but it won’t derail broader economic growth and won’t spill over into a broader downturn in 2019. Home sales and broader economic activity could slow more substantially in a handful of regional markets — primarily in the least affordable parts of the country — but it will pick up in more afford- able areas. KIEFER: The most important trend I’m watching in 2019 is whether or not the housing market adjusts to higher mortgage interest rates. The U.S. housing market remains out of balance due to a shortage of total housing supply (both owned and rented) relative to demand, and while mortgage rates slowed activity in 2018, construction needs to pick up to move the housing market back closer to balance. We saw rates increase about one percentage point for the 30-year FRM

6.00%

40.0%

5.00%

4.00%

30.0%

3.00%

20.0%

2.00%

10.0%

1.00%

0.0%

0.00%

cost of leverage for the marginal home buyer. Continued increases in rates will see further weakening in these key housing measures while stabilization or a fall in rates could breathe new life into the market. GARDNER: One of the most im- portant trends in housing next year will be the continued resurgence of first time buyers — especially mil- lennials — as they form new house- holds, get married and have children. Although many of them will face significant obstacles to buying due to student debt, lack of down payments and high-priced housing in many ar-

“The housing market in 2019, after a period of uncertain direction and swings, will turn out to be quite boring.”

LAWRENCE YUN

TENDAYI KAPFIDZE

eas, this demographic is likely to buy more homes in 2019 than any other age cohort. An equally important sto- ry in 2019 will be the move back to a balanced housing market — one that we have not seen in over 16 years.

key trends that will shape housing in 2019. Although there has been a pickup in economic activity and a strong labor market in 2018, total home sales are on track to decline this year for the first time in four years. The housing market suffered

YUN: The housing market in 2019, after a period of uncertain direction and swings, will turn out to be quite boring. The financial market is always vulnerable to wild volatility, suggest- ing elements of casino psychology at times, but real estate tends to be

AARON TERRAZAS

DUNCAN: Rising mortgage rates and slowing economic growth are

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FEATURED ARTICLE: 2019 HOUSING OUTLOOK

What is your outlook for existing home sales

and prices in 2019? Why? Implications? 2

“With rising interest rates, demand should soften — both from increasingly stretched first-time buyers and from repeat buyers who opt against moving.”

DUNCAN: We expect existing home sales to stabilize in 2019, edging up slightly from the 2018 level to 5.4 million units, as the labor market continues to improve amid a rise in mortgage rates that is more gradual than the increase seen in 2018. Home price appreciation moderated during the second half of 2018 because of an increase in rates and a cooling in demand. As a result, the inventory of homes available for sale increased, helping improve the supply-demand imbalance. We expect home price appreciation to slow further, with the FHFA (Federal Housing Finance Agen- cy) purchase-only index rising about 4 percent in 2019 (fourth quarter- over-fourth quarter). That’s more than one percentage point slower than the projected increase in 2018. The impli- cation is that the peak existing home sales market, 2017’s 5.5-million-unit sales pace, is already behind us. ZANDI: Home sales will be flat in 2019 and house price growth will con- tinue to slow into the low single-digits. Higher mortgage rates combined with the previously strong run-up in house prices will weaken housing affordabil- ity and weigh on housing demand. Last year’s tax law, which scaled back various tax benefits for single family housing, is also hurting house prices in parts of the country where taxpay- ers rely on these benefits, such as the Northeast and California. Sales and prices will be weakest for high- er-priced homes.

TENDAYI KAPFIDZE

Economist

2019 Existing Home Sales

2019 Existing Home Prices

Zandi

Flat

Low single-digit increase

Yun

Up 1%

Up 2%

Terrazas

Down to 5.2 million units

Up 1.2%

Kiefer

Up 1%

Up 4% Up 3%

Kapfidze Gardner Duncan

Down 2% to 5%

Down 1.6%

Up 4.4%

Up slightly to 5.4 million units Up 4%

“The peak existing home sales market, 2017’s 5.5-million-unit sales pace, is already behind us.”

DOUG DUNCAN

ment in total home sales next year. However, if the Federal Reserve con- tinues to raise interest rates in 2019 at about the same pace as it did for 2018 — we expect to have seen four rate hikes in 2018 — to preempt rising inflation even as economic activity slows, we expect total home sales would likely decline in 2019 for the second consecutive year.

from a decline in affordability in 2018 because of rising mortgage rates and tight for-sale inventory. This low inventory of homes for sale helped boost home price gains so much that they outpaced house- hold income growth. We are seeing improving inventory conditions as well as moderating home price appreciation heading into 2019. Also,

labor market strength and wage growth have trended up. We expect that economic growth will moderate to 2.3 percent (fourth-quarter-over fourth quarter) in 2019 from a pro- jected 3.1 percent in 2018, due to tighter financial conditions and fad- ing fiscal stimulus. If mortgage rates increase gradually in 2019, as we expect, we should see an improve-

YUN: Home sales will rise by an unspectacular 1 percent and home prices will rise by only 2 percent, the slowest appreciation since 2011. Rising mortgage rates in themselves are a negative, but the reason for the increase is due to the positive news of continued job creation in the econ- omy. What it means for consumers are that they no longer need to make hurried decisions, and home sellers need to be realistic about how to price the home to the market. TERRAZAS: We expect home sales to slow in 2019, averaging around 5.2 million units at a seasonally adjusted

annual rate (SAAR) and for the median price of existing homes sold to rise 1.2 percent. Tight inventory has been weighing on sales over the past three years despite strong demand. With ris- ing interest rates, demand should soft- en — both from increasingly stretched first-time buyers and from repeat buyers who opt against moving. But inventory constraints are starting to ever-so-modestly ease which should lift sales above where they would have otherwise been.

“One of the most important trends in housing next year will be the continued resurgence of first time buyers — especially millennials … this demographic is likely to buy more homes in 2019 than any other age cohort.”

KIEFER: I’m expecting to see modest growth of about two percentage points

MATTHEW GARDNER

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FEATURED ARTICLE: 2019 HOUSING OUTLOOK

the third quarter of 2018 the median square footage for new homes was the smallest in six years. As a result, we expect new home sales to increase 1.2 percent in 2019 to 630,000. As is the case with existing home sales, we expect to see moderating home price gains for new homes sold in 2019. The implication is that we see more room to grow in the new home market in 2019, which could send sales to the highest level in the expansion.

Question 2.

KAPFIDZE: Rates will reduce demand, but a vibrant labor market (hopefully with more robust wage growth) and increasing share of sales to millennials who are entering their peak homebuying years will support demand. Expect rates to prevail and sales to contract marginally by 2 to 5 percent. Home price growth will moderate to about 3 percent, but we don’t expect a national decline. GARDNER: Unlike this year — where I expect to see home sales contract by 2.2 percent — I expect sales to rise by 1.6 percent in 2019, and my current price forecast suggests home values increasing by 4.4 percent. Home price

in total home sales from2018 to 2019, driven almost entirely by new home sales. Existing home sales look about in line with long run potential and so should grow about in line with age-adjusted households. With the population growing and the millen- nial generation showing up in the housing market, I would expect to see modest growth of 1 percent or so in existing home sales. Home price growth has moderated recently, and I expect that trend to continue. In 2019 national average existing home price appreciation should be about 4 percent, though that will vary a lot depending where in the country you’re living.

What is your outlook for new home sales and prices

in 2019? Why? Implications? 3

“With the population growing and the millennial generation showing up in the housing market, I would expect to see modest growth of 1 percent or so in existing home sales.”

YUN: New home sales will rise 11 percent as home builders will need to add inventory. Despite the slowdown in late 2018 for new home purchases, there is still inadequate home building compared to pop- ulation growth. As builders shift towards lower-priced homes — to the degree they can since labor, land, and material costs are rising — they can easily find buyers. Building McMansions will be problematic.

GARDNER: I am predicting new home sales will grow by 6.6 percent in 2019 and prices will rise by 3.5 percent. We have seen a fairly consis- tent rise in new home starts, but they remain well below where I would like them to be. Builders are still strug- gling with high costs for land, labor and materials, and that will hold them back from starting signifi- cantly more homes.

LEN KIEFER

ZANDI: Same response as to

growth will slow given the fact that we have reached an affordability “ceiling”. This slowing of home price appreciation, in concert with rising wages, should lead to more buyers stepping up next year.

Economist

2019 New Home Sales

2019 New Home Prices

Zandi

Flat

Low single-digit increase

DUNCAN: New home sales performed better than existing home sales in 2018. The new home inventory has increased on an annual basis every month for over five years, although new home in- ventory as a percentage of households has remained

Yun

Up 11%

N/A

Terrazas

Slow to 505,000 units (SAAR)

Down 3.8%

U.S. HISTORICAL HOME PRICES & APPRECIATION

Kiefer

Up 10%

Median down, Constant Quality Index up

Kapfidze Gardner Duncan

Down 5% Up 6.6%

Down

MEDIAN HOME SALES PRICE

ANNUAL HOME PRICE APPRECIATION

Up 3.5%

$300,000

20%

Up 1.2% to 630,000

Moderating gains

15%

$250,000

“As builders shift towards lower-priced homes — to the degree they can since labor, land, and material costs are rising — they can easily find buyers. Building McMansions will be problematic.”

historically low. Market conditions in 2019 likely will continue to be a chal- lenge for home builders, with rising construction and regulatory costs, and a shortage of skilled labor. Some building material prices, such as soft- wood lumber, have eased in recent months, which should allow build- ers to offer more favorable pricing, hopefully leading to an improvement in building and sales activity going into 2019. One positive development in the new home market is that home build- ers appear to be responding to strong first-time buyer demand by construct- ing smaller homes. The typical new single-family home size has been fall- ing since reaching a peak in 2015. In

10%

$200,000

LAWRENCE YUN

$150,000

-5%

“As builders have more pricing and incentive flexibility, new home prices could actually decline in 2019, the extent of which will depend on the mix of homes and the extent of discounting.”

$100,000

-10%

$50,000

-15%

TENDAYI KAPFIDZE

-20% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

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FEATURED ARTICLE: 2019 HOUSING OUTLOOK

U.S. HISTORICAL NEW HOME PRICES & APPRECIATION

MEDIAN NEW HOME SALES PRICE

ANNUAL HOME PRICE APPRECIATION

15%

$350,000

$300,000

10%

$250,000

$200,000

$150,000

-5%

$100,000

-10%

$50,000

-15% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

able expectation. The homeowner- ship rate is a slow-moving residual economic indicator; it does not give much information about other near- term economic developments. In the long run, it does have implications for household net worth and thus wealth effects.

2016 at 62.9 percent, homeowner- ship rates have risen significantly to 64.4 percent. I fully expect the rate to continue rising back up to its long- term average of around 65 percent and, likely, move even higher as the millennial generation continues to buy homes.

What is your outlook for homeownership rates in

2019? Why? Implications? 4

TERRAZAS: We expect new home sales to slow in 2019 averaging around 505,000 units SAAR and the median price of new homes sold in 2019 to fall about 3.8 percent, driven primarily by a shifting regional composition of new home sales. New home sales plateaued in 2018 and builders began to hold off on starts. Rebuilding in several regions devas- tated by natural disasters in 2018 should boost home building but not enough to offset a general slowdown. KIEFER: The market for new sin- gle-family homes needs to adjust in 2019. We’re expecting to see about a 10 percent increase in new home

home sales. In 2018 however, despite the added pressure from material and labor costs, new home sales proved resilient to rising rates and are down just 3.4 percent year- to-date through September. The accumulation of past interest rises and further increases in 2019 are likely to start to fully impact the in- dustry. Thus, we expect new homes sales to underperform existing homes sales, likely falling more the 5 percent. As builders have more pricing and incentive flexibility, new home prices could actually decline in 2019, the extent of which will de- pend on the mix of homes and the extent of discounting.

sales in 2019, but that’s going to re- quire homebuilders to continue the trend of a moderation in the size of newly constructed homes. Look for more growth in the more moderately priced new home segment. If build- ers deliver into that segment, then new home sales will pick up in 2019. If builders do shift to smaller, less expensive homes, then the medi- an sales price of new homes may decline, but I would expect a con- stant quality index (that adjusts for the mix of sales) would post modest growth in 2019.

KAPFIDZE: Homeownership rates will likely continue their recent ad- vance given only moderate declines in home sales. An increase of half a percentage point would be a reason-

GARDNER: After bottoming out in

Economist

2019 Homeownership Rates

“The U.S. homeownership rate has ticked up in 2018, and I expect that to continue in 2019. We looked at young adult homeownership and found significant pent-up demand amongst those ages 25 to 34.”

Zandi

Unchanged Small gain

Yun

Terrazas

Up to 64.7% by year-end

Kiefer

Kapfidze Gardner Duncan

Up half a percentage point Up toward 65% or higher Up but at a slower rate

LEN KIEFER

KAPFIDZE: New home sales are more rate sensitive than existing

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FEATURED ARTICLE: 2019 HOUSING OUTLOOK

DUNCAN: The homeownership rate rose on an annual basis during the third quarter of 2018 for the seventh consecutive quarter, the longest such streak in 14 years. Homeownership rates continue to increase the most for the youngest households. The rate for households 35 years old or younger saw the fourth straight quarter of annual increases at, or exceeding, one per- centage point. We expect that the homeownership rate will continue to improve in 2019 but the pace of im- provement will likely slow from what we saw in the past two years as we expect economic growth to slow and

have eased lending standards, they remain relatively tight. Since the housing crisis, underwriting stan- dards are designed not to just allow households to own a home but to

continued gains in mortgage rates. The homeownership rate will likely remain well below its pre-recession peak, which was fueled by loose lending standards. While banks

“The strong job market and somewhat easy underwriting standards will support more homeownership, but higher mortgage rates and lower housing affordability will constrain first-time homebuyer demand. Much of the large millennial cohort is still a few years away from becoming homeowners.”

DOUG DUNCAN “The homeownership rate will likely remain well below its pre-recession peak, which was fueled by loose lending standards. … Since the housing crisis, underwriting standards are designed not to just allow households to own a home but to help them stay in the home.” looked at young adult homeowner- ship and found significant pent-up demand amongst those ages 25 to 34. As the bulk of the millennial pop- ulation moves towards the higher end of that age range, then home- ownership should tick up. That’s exactly what we saw in 2018: the homeownership rate for households under 35 increased by 1.3 percent- age points from the third quarter of 2017 to the third quarter of 2018. If that trend continues, and I think it will, then the overall U.S. homeown- ership rate should tick up in 2019.

MARK ZANDI

U.S. HOMEOWNERSHIP RATES BY AGE RANGE

historic lows. More inventory choices combined with many millennials steadily approaching the typical age of a first-time buyer of 32 years will allow some to turn the aspiration of homeownership in to a reality. TERRAZAS: We expect the home- ownership rate to increase modestly from 64.4 percent in Q3 2018 to 64.7 percent by the end of 2019. While a rising interest rate environ- ment will slow home sales, large cohorts of young adults are moving toward their core home-buying years. In addition, income growth should remain steady driven by a strong labor market, and we should see more migration toward more af- fordable parts of the country – both of which would push up the home- ownership rate. KIEFER: The U.S. homeownership rate has ticked up in 2018, and I expect that to continue in 2019. We

help them stay in the home. For example, lenders are required to determine and document a borrow- er’s ability to repay the loan, based on a fully amortizing payment. With more prudent lending standards, the homeownership rate should increase as the economy continues to expand but it likely will not rise to the level seen during the mid-2000s. in 2019. The strong job market and somewhat easy underwriting standards will support more home- ownership, but higher mortgage rates and lower housing affordability will constrain first-time homebuyer demand. Much of the large millennial cohort is still a few years away from becoming homeowners. YUN: The homeownership rate will notch up a small gain with first-time buyer activity rising from ZANDI: The homeownership rate should remain largely unchanged

TROUGH HOMEOWNERSHIP RATE (Q2 2016)

PEAK HOMEOWNERSHIP RATE (Q2 2004)

Q3 2018 HOMEOWNERSHIP RATE

90.0

80.0

70.0

60.0

50.0

40.0

30.0

20.0

10.0

0.0

U.S. Under 35 years 35 to 44 years 45 to 54 years 55 to 64 years 65 years and over

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FEATURED ARTICLE: 2019 HOUSING OUTLOOK

trade tensions, are downside risks. The base case is for an increase and rates could be up about 50 bps in 2019 if the economy evolves as currently expected by the Fed forecast. The implications of the rise in rates are what we have experienced the past year, a small decline in sales, a moderation in home price growth and sharp contraction in refinance originations. GARDNER: On average, mortgage rates have been rising since September of 2017, and I see no reason why this trend will not continue in 2019. My cur- rent forecast calls for the 30-year fixed conforming rate to rise to 5.5 percent

around 5.5 percent, but it may not reach that level until 2020. I’m antici- pating that the FOMC (Federal Open Market Committee) will go forward with two to three rate hikes in 2019 and longer-term rates, including mort- gage rates, to largely follow suit. Higher rates will dampen housing market demand and challenge potential buyers, but I expect a resilient economy (part of the reason rates will be higher) will help to boost incomes and some- what offset the sting of higher rates. KAPFIDZE: The labor market and inflation expectations are upside risks to rates while political instability, including

forecast for the housing market in 2019.

Where are mortgage interest rates headed in

2019? Why? Implications? 5

“A 30-year, fixed rate, conforming mortgage of close to 6 percent — which, while still low by historic standards, will impact certain buyers’ budgets and force some to consider smaller, less-expensive homes and/or homes in somewhat more affordable areas.”

ZANDI: Mortgage rates will increase in 2019. The rate on a 30-year fixed rate mortgage is expected to increase from close to 5 percent currently to near 5.5 percent by the end of 2019. Pushing mortgage rates higher will be a steady normalization in the Fed’s monetary policy (as) unemployment declines into the low threes and wage and price pres- sures develop more fully. The nation’s ballooning budget deficit, which will add to the supply on long-term bonds, and the winding down of the Fed’s balance sheet will add to long-term rates. YUN: The Federal Reserve will raise its short-term rates by two or three times (not four or five times) in 2019. Consumer price inflation may have al- ready peaked. The long-term interest rates need not rise too much, and the mortgage rates are projected to finish the year at near 5.5 percent. TERRAZAS: Mortgage rates will continue tomove higher in 2019 ending the year roughly 100 to 125 basis points above their current level —a similar magnitude increase to what we have seen over the course of 2018. This implies rates for a 30-year, fixed rate, conforming mortgage of close to 6 percent —which, while still low by historic standards, will impact certain buyers’ budgets and force some to consider smaller, less-expensive homes and/or homes in somewhat more affordable areas. Rising mortgage interest rates are also likely to push some would- be move-up buyers to reconsider selling, as the monthly costs for a comparable or possibly even smaller/lower-quality home rise as rates increase andmatch or even exceed the monthly costs of their current home locked in at a lower mortgage rate.

KIEFER: The era of high homebuyer af- fordability and dirt-cheap mortgage rates is probably over. The housing market, which has benefited by nearly a decade of super-lowmortgage rates will have to adjust to higher rates. That doesn’t mean we will have sky high rates though. Mortgage rates are likely headed above 5 percent for the 30-year fixed mortgage. That would be the highest rate in over seven years. Longer term I would expect the 30-year to settle

AARON TERRAZAS

by the fourth quarter of 2019; 6 percent mortgages are likely to be a 2020 story.

economic activity and anchored infla- tion, we expect 30-year fixed mortgage rates to rise to only 5.0 percent by the end of 2019, from about 4.8 percent in late November 2018. Monetary policy affects the economy with long and variable lags. Cumulative increases in interest rates have not yet had their full impact on the economy. At the same time, the Fed is reducing the size of its balance sheet by stopping reinvesting in maturing agency debt and mortgage-backed securities, which will likely widen mortgage spreads and increase mortgage rates. We believe that the Fed should pause after two rate hikes in the first half of 2019 to assess overall economic activity. However, the unemployment and inflation rates are lagging indicators. Thus, even if econom- ic activity starts to slow, the unemploy- ment rate will likely continue its down- ward trajectory. As the Fed believes in the negative relation- ship between the

DUNCAN: With the labor market continuing to tighten and inflation hovering around the Fed’s 2-percent target, we expect the Fed to stay the course, raising the target federal funds rate further in 2019. The Federal Open Market Committee (FOMC) members’ median projection for the federal funds rate at the September meeting implied three interest rate hikes in 2019. How- ever, we expect the Fed to raise rates twice in the first half of 2019 and then pause in response to signs of a slow- down in economic activity in the U.S. and abroad. We expect the unemploy- ment rate to start to rise in late 2019 through 2020 and expect inflation to ease at the same time. With our as- sumption that the Fed will slowly raise short-term interest rates amid slowing

MORTGAGE RATES & HOME PRICE APPRECIATION ANNUAL HOME PRICE APPRECIATION 30-YEAR FIXED MORTGAGE RATES

6.00

18%

16%

5.00

14%

12%

4.00

10%

3.00

2.00

Economist

2019 Mortgage Rates

unemployment rate and inflation, it may raise interest rates further to prevent an overheating econo- my. A faster pace of monetary tightening than expected is a key downside risk to our

Zandi

Up to 5.5% Up to 5.5%

Yun

1.00

Terrazas

Up 100 to 125 basis points to ~6%

Kiefer

Up to above 5% Up 50 basis points

Kapfidze Gardner Duncan

0.00

Up to 5.5% Up to 5.0%

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FEATURED ARTICLE: 2019 HOUSING OUTLOOK

Do you expect a recession in 2019 or 2020, and if yes how will that impact the housing market? 6

“A recession could have mixed effects, lowering sales but also lowering rates, which could support prices.”

TERRAZAS: We do not expect a recession in 2019. If a recession does occur in 2020, the housing market will not be at the center of the downturn. KIEFER: Many analysts have called for a recession in the next two years, but that’s not my expectation. There’s certainly a risk, and imbal- ances in the broader economy have been rising over time, but I think the economy will remain on track the next two years. However, if the next recession does hit in the next two years, I don’t anticipate housing to be hurt nearly as much as in the Great Recession or even a typical reces- sion. A rise (in) unemployment and a drop in income would choke off housing demand and hurt housing “The recession itself will likely be caused by the Federal Reserve raising interest rates too quickly or the U.S. Administration continuing its trade war with China. As far as housing is concerned, I really do not see much in the way of an impact.”

TENDAYI KAPFIDZE

markets, but unlike a decade ago there isn’t that much excess supply on the market and there’s substan- tial pent-up housing demand. If the next recession hits after interest rates have normalized, there may be room to stimulate the economy through lower rates. Unlike after the Great Recession, the housing mar- ket recovery after the next reces- sion may be exceptionally strong. KAPFIDZE: A recession is not our base case, but the risk is rising. A slower growing economy will be more vulnerable to adverse shocks. The impact would depend on the type of recession. The odds of a 2008 type recession are slim, given that excesses in the economy have not built up in a similar way and the housing sector is unlikely to be a catalyst for recession; 1991 and 2001 are likely better years to model a coming recession with regards to housing as the housing sector was not a proximate cause. In both those cases the existing home sales declined marginally, new home sales fell more sharply but home prices proved resilient as they actually benefited from lower rates. Thus, a recession could have mixed effects, lowering sales but also lowering rates, which could support prices.

ZANDI: Recession risks will be highest in 2020. The fading of fiscal stimulus — deficit-financed tax cuts and government spending increases which are currently juicing-up growth — and higher interest rates, will cause

GARDNER: My current forecast is for a business cycle recession to start at some point in 2020. The reces- sion itself will likely be caused by the Federal Reserve raising interest rates too quickly or the U.S. Administration continuing its trade war with China. As far as housing is concerned, I really do not see much in the way of an impact. Historically, recessions cause home prices to pause, not go down. This has been the case in every recession since the 1970s with the exception of the Great Recession in “Unlike after the Great Recession, the housing market recovery after the next recession may be exceptionally strong.”

2008, which was specifically caused by the crash of the housing market.

Economist

Recession in 2019 or 2020?

Zandi

Highest risk in 2020

Yun

No in 2019, less certain in 2020

DUNCAN: Our base forecast points to a continued economic expansion, with economic growth moderating in 2020 from 2.3 percent in 2019. Howev- er, with growth slowing in coming years, a shock to the economy could lead to an economic downturn. For example, escalating trade tensions with our major trading partners could erode business confidence, leading business owners to postpone investment and hiring plans. Alternatively, a geopolitical turmoil that leads to a surge in oil prices would likely prompt the Fed to be more aggressive in raising interest rates, which could, in turn, derail the expansion. History tells us that engineering a soft landing is hard to do. In the event of a mild reces- sion, housing could provide a cushion for the economy. The Fed would cut interest rates, and if unemployment rose only moderately, there could be some demand for housing.

Terrazas

No No

Kiefer

Kapfidze Gardner Duncan

No, but rising risk

Yes, in 2020

YUN: No recession in 2019 because of housing as positive contributor. 2020 is less certain with GDP just a hair above zero. There is still a need to build more homes from the accumu- lated inadequate production of the past decade. So the housing will be a positive contributor to the economy, (and) thereby soften any negative fall- out from (a) stock market correction or slowdown in business spending activity. Government spending will also act as a buffer with much needed infrastructure investment set to rise.

growth to slow substantially by 2020. The rapid growth in leveraged lending to nonfinancial businesses and liquid- ity constraints in the shadow financial system are mounting vulnerabilities to the current expansion. Housing demand, construction and housing prices will suffer in a recession, but not nearly to the same extent as in past downturns. Cushioning the im- pact of recession on housing are the current record low vacancy rates, and while house prices have risen strong- ly since the housing bust, valuations are not a serious threat.

LEN KIEFER

MATTHEW GARDNER

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FEATURED ARTICLE: 2019 HOUSING OUTLOOK

HOUSING AFFORDABILITY & MIGRATION

How will population and job migration patterns

impact regional housing trends in 2019? 7

“The long-term trend toward less mobility won’t fundamentally shift, but we should see slightly higher migration rates as the least affordable areas push people out.”

ANNUAL INCOME NEED TO BUY A MEDIAN-PRICED HOME (3% DOWN AND 28% FRONT-END DTI)

BREAKDOWNS BY INCOME TO BUY $100K+ to Buy a Home Less than $100K to Buy a Home

$7,597

$377,210

YUN: Hello Florida, Tennessee, Texas, and Nevada. Increasing number of tax filers will begin to recognize a higher cost of living in California, Connecticut, Illinois, New Jersey, and New York from inability to fully deduct mortgage interest and state-and-local taxes. So the migration of baby boomers into warmweather states as they (transition) into retirement age will accelerate with an extra nudge from tax considerations. Regarding jobs, com- panies will expand into more affordable regions of Rocky Mountain states and Southern states. That is, homeowners will do very fine in places like Utah, Texas, and North Carolina. TERRAZAS: Population and job migra- tion should tick upward in 2019 driven by a cyclical boost in cross-market job seek- ers and a tight national labor market. The long-term trend toward less mobility won’t fundamentally shift, but we should see slightly higher migration rates as the least affordable areas push people out. KIEFER: While much of the focus is on national trends, local market dynamics are incredibly important for understand- ing housing markets. We have seen that the markets with the most robust pop- ulation and labor market growth have tended to have the strongest housing markets, while areas with declining populations, such as many Rust Belt cities, have struggled. Those trends have been evolving over decades and likely will persist into 2019. Areas dependent on agriculture or other export-focused goods and services may struggle if trade

AARON TERRAZAS

POPULATION

30.03%

“Regions that historically benefit from migration will continue to do so. These are largely in the south, particularly Florida due to retirees, and increasingly Texas due to its labor market.”

69.97%

TENDAYI KAPFIDZE

2017 COMBINED NET MIGRATION (CENSUS)

902,999

disputes widen or global growth slows.

gration will continue to do so. These are largely in the south, particularly Florida due to retirees, and increas- ingly Texas due to its labor market. GARDNER: Over the past few years there has been significant migration to the Seattle area from cities in Califor- nia like San Francisco where home prices and taxes are substantially higher. Given continued growth in Se- attle’s technology sector, I expect this trend to continue, allowing regional home price growth in 2019 to trend above its long-term average. DUNCAN: We have not complet- ed an analysis for regional housing markets for 2019. ZANDI: The Trump Administration’s anti-immigration policies have begun to reduce household formations and thus housing demand. This will become more evident in 2019. Millennials living with their parents should also finally begin to decline in 2019, supporting multifamily rental demand.

KAPFIDZE: Interstate migration and labor force mobility have been in decline since the late ‘80s. Even in years of high migration, most real estate dynamics depend on the local population in place and the evolution of the labor market. Nonetheless, re- gions that historically benefit from mi- “Hello Florida, Tennessee, Texas, and Nevada. Increasing number of tax filers will begin to recognize a higher cost of living in California, Connecticut, Illinois, New Jersey, and New York from inability to fully deduct mortgage interest and state-and-local taxes.”

79,741

$100K+ to Buy a Home

Less than $100K to Buy a Home

2017 POPULATION NET MIGRATION (U.S. CENSUS)

MEDIAN HOME PRICE

-49,770

49,770

530,446

210,503

$100K+ to Buy a Home

Less than $100K to Buy a Home

PCT OF INCOME TO BUY

67.7%

37.6%

LAWRENCE YUN

CLICK TO VIEW INTERACTIVE VISUAL

$100K+ to Buy a Home

Less than $100K to Buy a Home

20 think realty housing news report

january 2019 21

The Fairmont Washington D.C.

21-22

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22 think realty housing news report

january 2019 23

I WANT TO KNOW ABOUT A MARKET’S GROWTH SPURTS AND WHAT THEY TELL ME ABOUT POSSIBLE RENOVATION LEVELS AND POTENTIAL DEFERRED MAINTENANCE.

5. Does the forecast show potential for appreciation?

Let’s talk about the types of data I collect, how I use it to answer these questions, and where you can find similar data. MARKET TYPE To know whether I want to buy and hold properties for the cash flow or just get in and out for a quick profit flip, I need to understand the historical appreciation a market has experienced. I want to know how much a market has appreciated since the data was first gathered in 1991 and especially how much prices have climbed since the 2009 trough. When I compare specific market data to the national average I can quickly see if high appreciation has pushed prices past the point where a buy-and-hold strategy makes sense. For example, when I look at numbers for Rust Belt markets like Detroit and Cleveland or bread-bas- ket markets like Kansas City and Topeka, or even deep south markets like Huntsville and Montgomery, I see that they have appreciated much less than the nation as a whole. This tells me that I need to look further, at additional data, to zero in on mar- kets I might want to invest in. Five- year, one-year, and 90-day trends show me if investing in a market still makes sense or if I’ve missed the cash flow party. If the data shows average or high- er-than-average appreciation, I take a different path — one that looks for flip opportunities in markets that

Before I dive into renovating a property, I need to know if the need- ed level of renovation will leave me enough room to make the cash flow I want. The percentage that fore- closed properties in a market are selling below non-distressed assets is the indicator I need. So, if distressed assets in a mar- ket are selling for 58 percent below regular market sales, I know I have room to renovate and remain com- petitive. However, if another market’s data shows foreclosures selling at 26 percent below non-distressed sales, I know I will be very limited on my abili- ty to perform significant renovations. Finally, to determine the market type, I need to know something about market price histories. I look for price data for the year 2000, spring of 2007, summer of 2009, and the current quarter. This allows me to spot bubble markets and to eliminate them from consideration as buy-and-hold targets. It also tells me if even flips may be too risky. For example, San Francisco peak- ed at $825,400 in 2007, dropped to $402,000 in 2009, and has climbed back to $1,600,000 in 2018. Knowing this can help me decide to 1031 ex- change properties in that market and

make rising prices a springboard to quick capital gains. As I look for markets where a buy- and-hold strategy will lead to passive income, I next look at median home age. I want to know about a market’s growth spurts and what they tell me about possible renovation levels and potential deferred maintenance. I also want to know what age of rentals po- tential tenants will be wanting. I don’t want to buy 70-year-old properties if renters would rather live in 30-year- old properties and those newer prop- erties are readily available. For example, my data shows me that in Scranton, Pennsylvania, 57 percent of homes were built before 1939 and the median home age is 74 years. Compare this to what my data shows for Fayetteville, Arkansas. In Fayetteville, 55 percent were built after 1990, and the median home age is 21 years. While I might be able to make a buy-and-hold strategy work in either market, this data tells me that a home built in the 1940s or 1950s in Scranton would be compet- itive in the rental market. Whereas in Fayetteville, a 75-year-old cash flow property might be in a D or F neighborhood rather than a C+, B-, or even B neighborhood. This data keeps me oriented if I am consider- ing both newer and older markets.

MY TAKE

Dig Deep with Data to Find Your Next Investment Market

BY JARED GARFIELD

Y ou’re waiting at your dentist’s office and you see a financial magazine. The headline grabs your attention — “Top 10 Markets for Real Estate Investors.” The article lists markets with rising rents and mar- kets with strong appreciation. But, it is of little help because everyone knows that past performance is a shaky foundation for tomorrow’s in- vestments and predictive data with- out context can be more dangerous than helpful. If you are part of or want to be part of the new wave of investors

using online data to make spot-on investment decisions, you need data that will give you a clear line of sight to the proper conclusions. You need data that helps you pull the trigger with confidence when you’re ready for your next deal. The type of analysis such data promotes is not for hedge fund man- agers alone. In fact, the same data I use to make decisions for the funds I work with is the data you need to zero in on personal investments. Trusting partners and providers is good, but verifying your decisions

with primary source data is better. I use a spreadsheet packed with more than 50 columns of data. Much of this data is available to anyone. The data helps me answer five key ques- tions about each market I look at:

1. Is it a cash flow or flip market?

2. Is there enough supply and enough demand? 3. Is there room for the profits I require?

4. Is there sufficient rental demand?

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