The economy should be driving a better housing market than what we’ve been seeing, according to Rick Sharga, EVP of Carrington. Sharga recently led a “State of the U.S. Housing Market” webinar for the firm titled, “Danger Ahead? 2018 Housing Review & 2019 Forecast.”
Sharga said the U.S. economy by all objective means is continuing to hit on most, if not all, cylinders. The numbers are “very positive,” and the GDP continues to outpace expectations at over 4 percent a quarter ago and just at 4 percent most recently. He said most economists predict more moderate GDP growth over the next year at around mid-2 percent, and most are predicting a mild recession in late 2019/early 2020. He pointed out that when long-term interest rates dip below short-term rates, that usually is followed by a recession within the next nine to 12 months, and he added that the most likely reason for a recession over the next few years would be the Fed overcorrecting.
Sharga also said job creation is going very well, with the country averaging more than 200,000 additional jobs a month for the last couple of years. A good percentage of these are good-paying jobs.
Also, not surprisingly, unemployment continues to hold at a 49-year low, said Sharga, adding that the last time unemployment was this low was when Nixon was president. Unemployment rates have consistently improved, but labor-force participation rates are still relatively low, he pointed out. Since the recession, people in their prime employment years are being employed at a much higher rate than Baby Boomers and younger-age workers. He said people are retiring earlier and staying in school longer, the latter of which used to be due to a lack of available jobs, but now there are more available jobs than workers looking for jobs. He added that federal immigration policies will also affect the number of available workers.
Sharga also noted that we’re still dealing with historically high levels of part-time workers. Thanks to the gig economy, people are augmenting their income via Uber, Lyft, and Airbnb, and we have a high percentage of part-time workers and those working multiple jobs because they can’t find a full-time job they like. The drawback to this is that many people are having trouble affording and qualifying for a mortgage, which is not good for the housing market.
Nevertheless, we are starting to see wage growth steadily improve, said Sharga, increasing in the 3.5 percent to 4 percent range, which is a sign that the economy is moving in the right direction. But, he noted, as wages goes up, the cost of goods goes up and inflation rises. At this point, however, inflation is still relatively low.
With regard to the housing market, rising prices, and low supply are the problem, said Sharga. The market is still dragging around at about four months of supply, although year-over-year we have seen a steady increase in inventory. There are still inventory issues where there are more buyers than homes to buy, and prices in some markets — but not all — are going down. He said there’s virtually no inventory at the low end of the market.
Homeownership duration, an underreported factor, is also keeping inventory low, Sharga said. The average duration owners stay in their home rose from four years in 2008 to 10 years today. There are psychological reasons for this: homeowners are reluctant to put their homes on market because they’re afraid there won’t be anything for them to buy. Also, because of tax reform, it’s less than an optimal situation for them to take on a more-expensive house. For these reasons, baby boomers are stubbornly deciding to stay in place and renovate their homes to accommodate their needs rather than sell.
Scarcity is driving prices higher, Sharga said, adding that the number of months of supply could increase by 50 percent before prices begin to drop: we would need to reach about six months of supply before prices come down significantly.
Meanwhile, home prices are up about 5.5 percent nationally year-over-year, Sharga said. New home sales have cratered over last few months, which can’t blame on low inventory — this has rebounded.
We are starting to see a return to more normal levels of construction, Sharga said. Household formation has lagged behind expected levels, with more owner-occupied new households and fewer renter-occupied new households. This has huge implications for builders and home sales in general, but even though construction starts are increasing, there will still be a deficit of housing over the next few years, he noted.
Over the next year, we won’t see an end to the inventory balance over the next year, but we will most likely see a normal housing progression whereby prices come down when buyers don’t buy, Sharga said. We will see what happens in San Francisco and San Jose, which prices have skyrocketed, and in markets selected by Amazon for HQ2. We’re not in bubble territory yet, but some markets will see a significant correction, he predicted.