Economic and Housing Outlook NACO July 15, 2018 Robert Dietz, - PowerPoint PPT Presentation

Economic and Housing Outlook NACO July 15, 2018 Robert Dietz, Ph.D. NAHB Chief Economist

GDP Growth Stronger growth expected post-tax reform Annual Growth LT avg (‘58 - ’07) 3.4% Q/Q Percent Change, SAAR 2016 1.5% 10% 2017 2.3% 2018 f 2.9% 8% 2019 f 2.7% 2020 f 1.8% 6% 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 Current expansion is 108 months old – second longest 20 40 60 80 Expansion is 0 Trough to Peak, Months Source: The National Bureau of Economic Research (NBER). Dec 1854 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 Partic icip ipation 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 ight Labor Market 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% Job Openings Rate 4% 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.

Cumula lativ ive 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).

Ris isin ing Producer Pric ices 12-month Percent Change, SA 1 25 0.9 20 0.8 15 0.7 0.6 10 0.5 5 0.4 0.3 0 0.2 -5 0.1 0 -10 48 50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 Source: U.S. Bureau of Labor Statistics (BLS).

Target Federal l Funds Rate Fed will continue to raise rates 9% 9% 8% 8% 10-year Treasury 7% 7% 6.5% 6.0% 6% 6% 5.3% 5% 4.8% 5% 4% 4% 3.4% 3.3% 3.1% 2.9% 3% 3% 2.7% 2% 1.9% 2% Federal Funds Rate 1% 1% 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 data and NAHB forecast.

30 30-Year Fix ixed Rate Mortgage and 10-Year Treasury ry Rates will rise due to Fed policy and tight labor markets 12% 12% 30-Year Fixed Rate Mortgage 10% October 31, 10% 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 isin ing Population Entering Housing Demand Years: 2017 Millions 5.0 v Avg=4.3 4.5 4.0 Headship rates increase from 15% to 45% 3.5 Silent Generation: Greatest 3.0 Born 1928-1945 Generation: Born Before 2.5 1928 2.0 1.5 1.0 Gen Z: Gen X: Baby Boomers: Millennials: Born After 1997 Born 1965-1980 Born 1946-1964 Born 1981-1997 0.5 0.0 0 3 6 9 12 15 18 21 24 27 30 33 36 39 42 45 48 51 54 57 60 63 66 69 72 75 78 81 84 87 90 93 96 99

Household Bala lance Sheets A shift in debt away from mortgages % of Disposable Inc., SA 7.5% 8 7.2% 7 7.0% 6.7% Mortgage 6 6.5% 5 6.0% 6.3% 6.0% 5.9% 4 5.8% 5.5% 5.0% 3 Consumer 5.0% 2 4.9% 4.5% 1 4.4% 4.0% 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: U.S. Board of Governors of the Federal Reserve System (FRB).

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.

Exis isting Home 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&P/Case-Shil ille ler Natio ional US Home Pric ice 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/Wells ls Fargo HOI Affordability declining 90 80 78 70 National 62 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 imula lating Future Affordabil ilit ity 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 forecast prices, income, and interest rates 40 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

Buil ildin ing Materia ials – 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).

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).

Agin ing Labor Force for Constructio ion

Construction Sector Productiv ivity 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

Lots Housing Starts (Area) and Low/Very Low Lot Supply (bars) Starts (Thousands) Low Supply 2,100 70% 1,800 60% 1,500 50% 1,200 40% 900 30% 600 20% 300 10% 0 0% 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

Lendin ing – AD&C Access Millions $200,000 20% 1-4 unit Residential Construction Loans $180,000 18% Year-over-Year Growth Rates $160,000 16% $140,000 14% $120,000 12% $100,000 10% $80,000 8% $60,000 6% $40,000 4% $20,000 2% $- 0% 07 08 09 10 11 12 13 14 15 16 17 18

Regula latory ry Costs Ris isin ing – Up 29% Over Last 5 Years Total effect of building codes, land use, environmental and other rules

Regula latio ions - 32% of Mult ltif ifamil ily Develo lopment Costs New NAHB-NMHC research Government Regulations as a Share of Multifamily Development Costs 42.6%* 7.1% Cost increases from changes to building codes over the past 10 years 32.1% Development requirements that go beyond the ordinary 8.4% 7.0% Fees charged when building construction is authorized 5.4% 5.9% Cost of applying for zoning approval 5.3% 3.9% 21.7%* Other (non-refundable) fees charged when site work begins 4.0% 5.5% 5.2% 4.2% Cost of complying with OSHA requirements 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.

Forecasts

Household Formation Demand for home ownership strengthening Y/Y Change in Household Count, Thousands, NSA 2,000 Owner-Occupied 1,500 1,000 500 0 -500 -1,000 2,500 Renter-Occupied 2,000 1,500 1,000 500 0 -500 -1,000 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: U.S. Census Bureau (BOC): Housing Vacancies & Homeownership.