Economic and Housing Outlook Home Builders Association of Virginia - PowerPoint PPT Presentation

Economic and Housing Outlook Home Builders Association of Virginia June 22, 2018 Robert Dietz, Ph.D. NAHB Chief Economist

Housin ing Mark rket Growin ing; ; Sin Single le-Famil ily La Lags • Tax reform changes • Macroeconomics post-tax reform • Signs of growth momentum • Signs of a future slowdown • Housing demand and affordability • Demographics positive • Supply-side headwinds • State-level economic measures • Forecasts

Macroeconomics Post-Tax Reform

Tax Reform rm – Poli licy Ch Changes and Im Impacts • Economic impacts • GDP • Marked up 2018 forecast to 2.7% • Dynamic scoring model suggests 0.8% more GDP after 10 years • Business investment • 1.1% higher after ten years • Labor supply and employment • 0.6% higher • 0.9 million more workers in labor force • Reduced home price growth to a positive 2.9% growth rate in 2018 • Incoming data shows no such effect

Tax Reform rm Boosts Potentia ial l GDP Added economic efficiencies yield more room to grow Billions USD Billions, 2009 USD 25,000 800 Difference June, 2017 April, 2018 22,500 700 20,000 600 17,500 500 15,000 12,500 400 10,000 300 7,500 200 5,000 100 2,500 0 0 49 51 53 55 57 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19 21 23 25 27 Source: Congressional Budget Office.

Tax Cu Cuts Help lp Disp isposable le In Income Growth Bonuses and wage growth will drive gains Billions, 2009 USD, SAAR 14,000 13,000 2.4% annual 12,000 growth rate 11,000 2.1% annual growth rate 10,000 9,000 8,000 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 Source: U.S. Bureau of Economic Analysis (BEA) and NAHB forecast.

GDP Growth Stronger growth expected post-tax reform Annual Growth LT avg (‘58 - ’07) 3.4% Q/Q Percent Change, SAAR 10% 2016 1.5% 2017 2.3% 8% 2018 f 2.9% 2019 f 2.7% 6% 2020 f 1.8% 4% 2% 0% -2% -4% -6% -8% -10% 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 Source: U.S. Bureau of Economic Analysis (BEA) and NAHB forecast.

100 120 20 40 60 80 0 Current expansion is 108 months old – second longest Expansion is Trough to Peak, Months Dec 1854 Source: The National Bureau of Economic Research (NBER). Dec 1858 Jun 1861 Dec 1867 Dec 1870 is Aging Mar 1879 May 1885 Apr 1888 May 1891 Jun 1894 Jun 1897 Dec 1900 Aug 1904 Jun 1908 Jan 1912 Dec 1914 Mar 1919 Jul 1921 Jul 1924 Nov 1927 Mar 1933 Jun 1938 Oct 1945 Oct 1949 May 1954 Apr 1958 106 Feb 1961 Nov 1970 Mar 1975 Jul 1980 92 Nov 1982 120 Mar 1991 73 Nov 2001

Labor Force Part rtic icip ipatio ion Rate Improving labor force participation key to future growth Percentage, SA 85% 68% 67% 84% 66% Overall 83% 65% 82% 64% Age 25-54 63% 81% 62% 80% 61% 79% 60% 78% 59% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: U.S. Bureau of Labor Statistics (BLS).

Tig Tight La Labor Mark rket How low can unemployment go? Percent, SA Percent, SA 4.5% 12% 11% 4.0% Unemployment Rate 10% 3.5% 9% 8% 3.0% 7% 2.5% 6% 5% 2.0% 4% Job Openings Rate 1.5% 3% 1.0% 2% 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 Source: U.S. Bureau of Labor Statistics (BLS) and NAHB forecast.

Cu Cumula lativ ive Ch Change in in Emplo loyment by Age Group Mind the Gen-X gap Millions of Employees, SA 20 15 55 and Older 10 5 0 Under 55 -5 -10 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: U.S. Bureau of Labor Statistics (BLS).

Government Defic ficit its Growin ing Post-tax reform deficits add up to 30 basis points to 10-year Treasury rate Share of GDP, Percent $ Trillion 0.8 Government Deficit (End of Fiscal Year) 4% Government Deficit as a Share of GDP (End of Fiscal Year) 0.4 2% 0.0 0% -2% -0.4 -4% -0.8 -6% -1.2 -8% -1.6 -10% 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 Source: U.S. Treasury Department and Bureau of Economic Analysis (BEA) and NAHB forecast.

30 30-Year Fix ixed Rate Mort rtgage and 10-Year Treasury ry Rates will rise due to Fed policy and tight labor markets 12% 12% 10% 30-Year Fixed Rate Mortgage 10% October 31, 2016 8% 8% 6% 6% 10-Year Treasury 4% 4% Mortgage Risk Premium (Difference) 2% 2% 0% 0% 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 Source: Federal Reserve and Freddie Mac data and NAHB forecast.

Housing Demand and Affordability

Ris ising Population Entering Housing Demand Years: 2017 Millions 5.0 Headship rates increase from 15% to 45% v Avg=4.3 4.5 4.0 3.5 Silent 3.0 Greatest Generation: Generation: Born 1928-1945 2.5 Born Before 1928 2.0 1.5 1.0 Gen Z: Millennials: Gen X: Baby Boomers: Born After 1997 Born 1981-1997 Born 1965-1980 Born 1946-1964 0.5 0.0 0 4 8 12 16 20 24 28 32 36 40 44 48 52 56 60 64 68 72 76 80 84 88 92 96 100+

Consumer Debt Rise in student and auto loans 250% 8 226% 7 Student Loans 200% 6 151% 5 Auto Loans 150% Other 4 97% 100% 3 95% 80% 2 Credit Cards 50% 1 0% 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Federal Reserve Bank of New York.

Exi xistin ing Home Sa Sale les Low inventory Months’ Supply (Months, NSA) Thousands 8,000 14 7,000 Months’ Supply 12 Existing Home Sales 6,000 10 5,000 8 4,000 6 3,000 4 Existing Home Inventory 2,000 2 1,000 Existing Home Sales: Single-Family & Condo & Co-op, (Ths., SAAR) Number of homes available for sale: Single-Family & Condo & Co-op, (Ths., NSA) 0 0 05 06 07 08 09 10 11 12 13 14 15 16 17 18 Source: National Association of Realtors (NAR).

S& S&P/C /Case-Shil ille ler Natio ional l US S Home Pric rice In Index Prices growing faster than income Percent Growth, SAAR 20 15 10 5 0 -5 -10 -15 -20 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 Source: S&P Dow Jones Indices LLC; CoreLogic, Inc. and NAHB forecast.

Housin ing Affordabil ilit ity – NAHB/W /Well lls Fargo HOI Affordability declining 90 80 78 70 62 National 60 50 40 30 20 Q1_04 Q1_05 Q1_06 Q1_07 Q1_08 Q1_09 Q1_10 Q1_11 Q1_12 Q1_13 Q1_14 Q1_15 Q1_16 Q1_17 Q1_18 Source: NAHB/Wells Fargo Housing Opportunity Index.

Sim Simula latin ing Futu ture Affordabil ilit ity Co Condit itio ions HOI declines due to higher rates and costs/prices despite rising incomes 90 80 78 70 Q2 2019, 56, with 5% mortgage rate 62 60 National 50 Distribution of MSAs by change in the HOI using 40 forecast prices, income, and interest rates Declines of more than 10% 37% Declines of 5 to 10% 25% 30 No change to 4% decline 36% Gain of 1 to 5% 1% 20 Q1_04 Q1_05 Q1_06 Q1_07 Q1_08 Q1_09 Q1_10 Q1_11 Q1_12 Q1_13 Q1_14 Q1_15 Q1_16 Q1_17 Q1_18 Q1_19 Q1_20 Source: NAHB/Wells Fargo Housing Opportunity Index.

Supply-Side Headwinds

Build ildin ing Materia ials ls – So Softwood Lumber Since January 2017, Random Lengths Framing Composite Price Index up 63% Index 1982=100, NSA 270 263 250 230 210 190 170 150 2012 2013 2014 2015 2016 2017 2018 Source: U.S. Bureau of Labor Statistics (BLS).

La Labor Elevated count of unfilled construction jobs 5.0% 1.00 Job openings rate - Construction 4.5% 0.90 12-month moving average 4.0% 0.80 3.5% 0.70 3.0% 0.60 2.5% 0.50 2.0% 0.40 1.5% 0.30 1.0% 0.20 0.5% 0.10 0.0% - 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 Source: U.S. Bureau of Labor Statistics (BLS).

Construction Sect ctor Productivity Lagging overall economy Index, 1993 = 1 1.6 Construction Worker Productivity Overall Worker Productivity 1.4 1.2 1.0 0.8 0.6 0.4 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

Regula latory ry Co Costs Risi ising – Up 29% Over La Last 5 Years Total effect of building codes, land use, environmental and other rules

Regula latio ions - 32% of f Multif ltifamil ily Develo lopment Co Costs New NAHB-NMHC research Government Regulations as a Share of Multifamily Development Costs 42.6%* Cost increases from changes to building 7.1% codes over the past 10 years 32.1% Development requirements that go beyond 8.4% the ordinary 7.0% Fees charged when building construction is authorized 5.4% 5.9% Cost of applying for zoning approval 5.3% 3.9% Other (non-refundable) fees charged when 21.7%* 4.0% 5.5% site work begins 5.2% Cost of complying with OSHA requirements 4.2% 2.3% 2.3% 7.3% Others 4.8% Lower Quartile Average Upper Quartile Note: * For quartiles, all types of costs do not sum to the total. Source: NAHB/Wells Fargo HMI survey.

A Local Look

Virginia GDP Growth Q/Q Percent Change (annualized), SAAR 8% 6% 4% 2% 0% -2% -4% -6% -8% 05 06 07 08 09 10 11 12 13 14 15 16 17