Bruce Norris is joined again this week by Dr. David Crowe. Dr. Crowe is Chief Economist and Senior Vice Pretsident of the National Association of Home Builders. He is responsible for NAHB’s forecast of housing and economic trends, survey research and analysis of the homebuilding industry, and consumer preferences as well as micro economic analysis of government policies that affect housing.
David has a lot of experience that would lead him to be a very good person to have this position, including his study in demographics. Bruce asked about the role of the NAHB as it relates to the building industry. David said they are the representatives of the homebuilders in Washington. Their primary focus is sitting in the nation’s capital and watching over the interests of the homebuilding industry, not just homebuilders but all the industries dependent on building homes. As a result of that, they do a lot of education, trade shows, and research to try to inform both the builders and public on what is happening in housing.
Bruce asked if the NAHB considers itself part of a team in the sense that you work with the Mortgage Bankers Association or NAR together to influence positive outcomes for everyone. It is very much a team effort in Washington. Most all housing issues have an effect upon all of their interests, especially with realtors, mortgage bankers, and some of the lesser known housing organizations. This could include the banking organizations since so much is tied up in what happens in the mortgage markets as well as the appraisal institute.
Bruce asked if there was any legislation that passed in 2014 that either concerned him or made him happy. David said unfortunately there was hardly any passage of legislation in 2014 since it was a slow year. They were fighting hard to get some legislation to clarify what the position of the government is related to housing finance and Fannie Mae and Freddie Mac. None of the team of this correlation has been successful in that regard. Bruce asked if the rules are set now for the financing part of it. Are the builders understand what changes took place and what Dodd-Frank will not turn into and if that is just as valuable as what it did ultimately turn into. There is still a lot of uncertainty out there about where the housing finance industry is going. Some of the regulations behind Dodd-Frank have yet to be clarified or defined. Even with the rules that have been defined, there is still enough haziness there that there is some uncertainty. They still have work to do to get the housing finance business back in perfect shape again.
Uncertainty is a very important word because when you are in the lending business, and part of the uncertainty is if we write a certain type of loan, we may end up getting to buy it back. This does not just affect realtors, but builders as well since you cannot get financed the same buyers that you would years ago. One of the terms that has been tossed around is the put back risk, and this has been a big dampening factor on mortgage originators since the potential to have that mortgage returned to them for often some inconsequential issues that do not really affect the core of the mortgage. They have been working on this, and the Federal Housing Finance Agency that is a regulator of Fannie Mae and Freddie Mac have made some important announcements and efforts to alleviate some of the uncertainty. He is very hopeful that 2015 will see some improvement in that regard.
In the area in which Bruce lives, the downgrading of the value of the FHA loan limits was a problem. In Riverside County, construction is generally going to have a home price over $350, and this turned out to be the maximum loan limit. It went from $500 to $350. This recent ruling that Fannie Mae and Freddie Mac will loan on 3% could be a big help to the builders at least in his area of California. Those reduced limits were harmful, particularly on new homes which tend to sell at the upper end of the spectrum. It is hopeful that this new permission for Fannie and Freddie to go down two lower down payment loans will help in that regard.
Bruce asked when he looks back at his forecast for 2014, were there any disappointments or surprises? David said there were both disappointments and surprises. The real surprise was the way the year started, although he would say California was saved from most of this. The rest of the country suffered from unusually bad weather, particularly snowy weather. That really held up construction and made it impossible to conduct construction or to get the materials and workers to the site. They saw a very low beginning to the year, and that unfortunately stretched halfway through the year. A lot of the part of the year picked up nicely. However, as a whole the year will not be as good as he expected at the beginning because of that poor start.
Bruce asked David what he sees for 2015, to which he said he sees an improvement in 2015 for two reasons. One is they did not live up to the muster in 2014, so that left an even larger amount of pent up demand out there of folks who went through the normal life cycles that you would expect. This includes changes in jobs, marriages and children, and therefore they would not see them buying another house. This pent-up demand is one part of the 2015 promise. The other is very good economic conditions. We had strong employment growth throughout 2014, very low mortgage rates, and affordable house prices. Even though prices have been rising and people are regaining some of their equity, we still have overall good economic growth. Those are all the right ingredients to see a decent year, though not a run-away year. However, there is something in the order of a 25% increase in single-family building between 14 and 15.
In California, if you add up all the construction of single-family homes over the last six years, you do not equal the number of homes built in 1960. That tells you where the California market has been, which has been a depression mode for half a dozen years. However, it is starting to see some growth and faster growth than in the beginning of the recovery where it was still lying low at the bottom. The percentage growth looked nice and promising in California since we are starting at 3. It is still an improvement, and this is a big driver for California especially in some areas.
The one thing that makes Bruce scratch his head is the lack of the decision-making by the millennial generation that would have gone on for most other generations. Bruce asked if the waiting to get married and own a home is the new normal for them or if the recession really had a big impact on their capability of making that decision. This is a question they are constantly trying to get better answers. There really were two causes. The recession hit the younger people worse since they have a higher unemployment rate even though it has improved. They have been much more reluctant to move on, and a double of the share that normally lives at home is living at home now. They are saddled with student debt, and they have not had the time to accumulate down payment. If they are working, they are often in jobs that require them to be mobile. This means from this standpoint they are much less likely to be a homeowner.
We had lower household formations, and those that have formed have almost all become renters. He does not think this is a long-term behavior. If you ask preferences of younger people, they do say they want to become homeowners. However, both of their abilities at this point in time and preferences are being footloose. Bruce asked if uncertainty plays a part in, for example, a 190-year old living at home when the Great Recession hit and prices went down by 55% in California. They watch their parents lose equity or lose their home. Bruce asked David if when you have your Master’s Degree you would look back at this moment and think owning a home is not worth it. David said yes and that this semblance of the depression psychology that hit our parents and grandparents had something to do with it. He does not think it is severe, but one that will be overcome. He thinks their experience and their view of other’s experiences may have colored their future.
The strongest correlation they find for some homebuyers is marriage and children, which they also postponed. However, the key word here is postponed and not eliminated. He does not think the first-time homebuyer will be a big part of next year, but they still have another year before we will start seeing the oldest of that millennial generation start hitting the clock ticking and their own financial wherewithal becoming more solid. He thinks we will see them re-enter that path that we saw past generations experience.
What is interesting is that Bruce got his start because he was able to buy properties and have them go up in California. He is a big believer in owning something, but he thinks one of the things young people have a hard time appreciating is the interest rates of today. He was in the business in 1980, and he refinanced his house to become an investor at 17 ½, so he cringes when he sees articles that say interest rates soared above 4%. Relative changes matter, so if you just experienced 3 ½, then 3 ¾ – 4 doesn’t sound so bad. Bruce said he can appreciate this, but one thing we really lack right now is volatility. We have not had a Fed fund rate change for 5-6 years, and the year he happened to get in they had 21 Fed fund rate changes. The fact that they have been so solid leads one to believe they will always be solid, but he does not think this is true. He believes the very reason we are going to have better sales and starts next year is because the economy is better. If the economy is better, this means there is a lot more demand on capital, which means rates will rise.
Bruce asked about the baby boom generation and how this demographic presents opportunity for builders but also cause some problems. David said it presents opportunities because although the larger share of people over 55 or 65 do not do anything and stay where they are. This does not mean that, given there is a larger number of people in that age group, that it does not matter. The builders who specialize in the 55+ market, both in the restricted 55 only and general age group, have been doing very well since many of those people have lived in their house for a long time. While they may have lost equity in the downturn, they had equity and retained it. They are able to move forward. There is a pretty decent market and new homes catering to those who had passed the age of maternity.
The challenge is the many of them who do not have equity. They either refinanced or had recently moved. For whatever reason, they do not have the means necessary to move forward. This is where the challenge is in builders finding products that will satisfy that group and still be able to afford it. Going 10-15 years out, that generation is going to produce a lot of vacant homes. When they are adding to the inventory more than builders, you would normally build an entire year in California terms. This is a good ways out since the oldest baby boomers are 68. Even if, for health or other reasons, they start moving away from their own home into other facilities or in with their family, this is still another ten years away for the forefront of that group and 15-20 years before the bulk of them start doing this. It is a distance away, and in that time they are going through an enormous demographic shift from becoming minority majority nation. Many people other than the white culture are living in expanded households. David is not as concerned about the larger suburban homes that the baby boomer lives in that when they finally move out leave a big house available. There is a sufficient demand coming along with multi-generational houses, particularly among cultures other than the white culture that will find them exactly to their liking.
Bruce asked if the oil boom in the United States over the last few years has presented the builder with opportunities in selective areas. David said this is a double-sided coin. It has certainly boosted the economies in the middle part of the country. The oil and energy states from Texas up to North Dakota have done very well. If you look at recovery rates and look at where they are relative to where they should be, the center part of the country is doing quite well. This is because they did not collapse as badly. The challenge has been those in the very healthy energy sector that have taken all the employees away. They have had a very hard time finding somebody to build the houses, drive the trucks to bring the materials, and do the service because wages have been higher in the energy sector. This has been their challenge which they have met and been able to meet the demand for houses. It has been a struggle.
Bruce was in Midland, Texas two years ago visiting his granddaughter who was on a mission for school. When he landed there, he asked a few questions related to real estate. He wondered why there were no rental houses and very little new homes. He was completely dumbfounded and did not understand it, and neither did they. You go over there with no experience and make $85,000 while over here we have to pay McDonald’s workers $25 an hour to flip a hamburger. This is how tight the labor market is. Somebody is a framer for about 3 days, then they are on an oil rig where they do not know what they are doing and make twice as much. This has been a challenge, and their builders have often, particularly apartment builders, have just imported their trade, had them build houses, then go back home.
Apartment construction has been a booming sector of construction. If you consider whatever the early 200s were, it was the last time the market was in some reasonable balance. We are building more apartment units now than we did in the early 2000s. This is because a lot of the younger generation that has formed a household are renting rather than buying. Bruce wondered if these are amenity-driven. David said this is part of it. The multi-family developers are very sophisticated. They are not just putting units up, but putting up what will rent. Younger people do want amenities and closer to where they want to work and socialize. They want to be able to have these gathering places.
Bruce asked about the construction business as far as the level of contribution to GDP growth. He said it is not back to where it used to be. It is still about 3% of GDP right now, both new construction and remodeling. It should be 5-5 ½%, so we are still struggling. In terms of single-family homes across the country, we are only halfway back to where we need to be.
Bruce looked at a chart this morning, and the 3% figure short of the downturn of 2009-2011 has been 55 years since we have been 3% GDP contribution. This is a big deal, and he hopes someone is Washington is paying attention to this.
When Bruce was growing up the American dream was to own a home or two and get yourself into a new one. Bruce wondered if this is still a dream and if the policies are lending that opportunity to people. David said it is still a dream, but the policies are tough to get there. We have building codes that are personally reasonable to expect the government to figure out. In other cases, they are extreme and have gone over the top in requiring things that are not safety and health but nice to have. This is fine, but if somebody is in the market of buying nice is not a luxury. Codes and regulations, both development and the needs for requirements for the Federal government’s permissions slows down construction and makes it higher. This is why homebuilders have an association in Washington to watch out for that kind of thing. As we have discussed, the ability to receive financing remains particularly challenging for younger people. There are a lot of things out there we have to keep watching in order to at least allow people that option.
Bruce asked if he thinks the punitive stage has passed now as far chasing down lending policies and punishing everyone involved. Bruce wondered if we are moving forward and asking what we can do to get a normal market back. There was a certain amount of people causing a problem in housing, so you are going to suffer for it. He thinks this is prevalent in policy-makers’ minds and their way of saying they will take care of it. The pendulum swung way too far the other way. There is still a lot of nervousness about low-down payment loans, even though they were very successful for many years. They still worry about whether appraisals are right and whether 8 months can justify a certain monthly payment. They are not quite out of this fear yet that we suffered during the collapse.
One of the problems with them using the term that they caused it in that saying you punish the “you” you punish the “we.” It has been very tough for the person who wants to get in to own a home.
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