Could it really be possible that we are overbuilding? But what about the extreme undersupply of housing stock? NAR said we have a national deficit of over 5 million units. Economist, Dr. Peter Linneman says have a 2-3 million unit shortage. Wall Street housing analyst, Ivy Zelman says the deficit is less than one million units. These are all credible sources so how do we make sense of this? Perspective is key, different data tells different stories.
Completed Housing Units:
Looking at the past five decades of homebuilding it is easy to conclude that building fell way behind in the last 10 years. As long as the population grows at the historic rates, consistent building is necessary to keep up and to replace the roughly one million homes lost each year due to condemnation, natural disaster, or fire.
What if the population growth is not keeping up? According to the 2020 census, over the past 10 years, the US population increased by 22.7 million to 331.4 million. That is a 7.4% increase, lower than the 9.7% increase the previous decade and the lowest growth rate since the 1930s.
A challenge to a rising population is a declining birth rate. From 2007 to 2019 the birth rate decline was 1-2% a year. In 2020 the birth rate declined by 4%.
In 1985, 58% of buyers had kids under 18. Today, only 33% of buyers have kids under 18.
A household is one or more people living together (do not have to be related). If two people move into their own places while the third person remains, two households were created. Combining unsustainable home price appreciation and a declining household formation rate, the market will continue to moderate. Affordability matters.
Household formation is declining quickly, and population growth has stagnated. This will challenge what we know about how we use housing. Household formation has been falling for decades. With this rate of decline, using historic data is not beneficial, rather looking at the most current trends is what is more important. There is no benefit to building homes for a population that has enough homes.
Why is it declining? Urbanization. Populations are moving away from the country, suburban and urban areas are seeing the most population growth. Over 50% of the country’s counties had population decline over the past 10 years. Urban families tend to have fewer kids, more education, and live at home longer (later to get married and have kids).
The impact of overbuilding based on household formation will not be seen for many years.
National Real Estate:
Existing home sales increased 7% in September month over month, after a 2% decline in August. At this rate, 2021 will likely have the second-highest sales rate in history, behind 2005.
Appreciation is rapidly slowing. It has slowed from a year over year increase of 23.6% in May, to 23.4% in June, to 17.8% in July, to 14.9% in August, and now 13.3% in September. It is this speedy deceleration that likely caused the iBuyer challenges leading to Zillow’s pause on home purchases through the end of the year. Zillow, and to a lesser extent Opendoor, continued making offers as though the market was appreciating at this springs’ levels. An example is a Fountain Hills property which Zillow purchased for $566,000. Last week the asking price declined from $522,000 to $509,000. For more details on this “catastrophic failure on pricing” check out Mike DelPrete’s recent analysis (I helped him gather data), here.
There has been a small spike in property re-lists (properties that either canceled or removed to reset days) which is now 1.7% compared to last year’s 1.5%. We usually decline from now through the holidays and then a spike right after the holidays. In 2007 it was like 25% of the market. A climbing relist rate is a sign of a weakening market.
Goldman Sachs, not known for its residential real estate expertise, projects that housing will appreciate by 16% in 2022, much higher than many projections, and is a definite outlier. At 11%, Zillow’s most recent forecast is the closest to Goldman Sachs. CoreLogic forecasts only a 2.2% jump in U.S. home prices. Freddie Mac and John Burns Real Estate Consulting are forecasting home price growth of 5.3% and 4%, respectively. See chart below from Keeping Current Matters with the forecasts from MBA, Fannie Mae, and NAR. I expect that in 2022 we will have a 6-10% rate of appreciation locally.
The AZ Market
The new home market has stabilized and aside from its chronic labor and supply chain struggles is doing well. There is a 5.7 month inventory, at 6.5 months of inventory builders pull back, which is not the case today.
Over the past 12 months, builders in Greater Phoenix spent over $5 billion for 813 land purchases for new housing.
Despite single family permits declining in Greater Phoenix month over month in August, they are still up 27% year over year.
Nationwide there are currently 701,000 multifamily units under construction, the largest amount since July 1974, nearly 50 years ago!
New home sales increased by 14% in September month over month while remaining 17.6% below September 2020 new home sales. The median sales price reached a new record at $408,800 in September.
Real Estate News:
- In New York City, CoStar launched platform that is in direct competition with Zillow’s platform, StreetEasy. StreetEasy currently has no competition and charges agents to post listings. CoStar’s product, CitySnap, does not charge to post. NYC agents are excited. It begs the question, is it too late in the game to create a meaningful competitor for Zillow?
- The CFPB is hiring 20-30 more enforcement attorneys as it ramps up in enforcement. Under the Obama administration the CFPB had a lot of freedom and fined companies more than $11 billion. Under the Trump administration a lot of its power was reduced and the fines totaled about $1.5 billion. Now, under the Biden administration much of its original power from the Obama administration has been reinstated. The CFPB is tasked with enforcing lending laws and RESPA.
- Next month at the NAR Conference in San Diego the board will discuss, among other things, a policy that would require public display of buyer broker commissions and Realogy’s request that portals clearly display the listing agent separately from the advertising agent for each property listing.
- Howard Hughes Corporation purchased the proposed 37,000 acre master planned community, Douglas Ranch, in Buckeye AZ for $600 million. Plans include 100,000 homes; 300,000 residents; and 55 million square feet of commercial property.
- Goldman Sachs announced it will back a new SFR platform, Entera, which will match investors with finance options and rental properties. Could this investment influence its appreciation forecast?
- Opendoor will now make real-time offers on Realtor.com’s My Home dashboard.
The market is changing quickly and in order to survive and compete in today’s environment, it is important to understand the subtleties of today’s challenges. Also, as Marc King, Keller Williams’ President, suggested, agents must choose whether they want to be a “tech-enabled fiduciary” or an “Uber driver who opens doors.” The choice is yours.
DIRECTOR OF SALES