Analyzing the housing market can be complicated. There are so many opinions on issues that impact investors including which are the best markets, single-family versus multi-family investing, housing inventory, demographic shifts, renter preferences, mortgage rates, the strength of the U.S. economy, and so much more. Today’s guest is an expert on housing data and will help answer a lot of these questions.
Our guest today is CoreLogic’s chief economist, Frank Nothaft. He leads a team of economists who analyze and forecast trends in global real estate, insurance, and mortgage markets. He’s also held leadership positions at Freddie Mac and the Federal Reserve. He recently received the NABE Outlook Award for the most accurate macroeconomic forecast for 2018. He has also earned the Certified Business Economist designation from NABE, and holds a PhD from Columbia University.
Kathy Fettke: Welcome, Frank.
Frank Nothaft: Thanks so much for having me today, Kathy.
Kathy: There’s so much going on in the news and people are questioning what’s real news and what’s fake news these days. I think that data, it just speaks for itself, I hope.
Frank: Oh, I hope so too. The data are what the data are, and I tell you, I’ve never met a piece of data that I didn’t like.
Kathy: That is a good thing that you’re in the business of data. Let’s just look at some of the headlines we’re seeing. We see headlines that say there’s a shortage of housing inventory. Is that true?
Shortage of Housing Inventory
Frank: Oh yes, it is true. The inventory of homes available for sale right now, it’s the lowest that we’ve seen in decades. What we do is we actually measure the number of homes offered for sale and we compare that with the overall housing stock, because over time the number of homes in the United States grows because of new construction. When we look at the number of homes being offered for sale relative to the entire housing stock in the United States, gosh, it’s as low as we’ve seen in 30 years.
Kathy: Wow. Why is that?
Frank: Well, in large part it’s because we’re not building enough new homes. Single family home building got hit really hard during the Great Recession 10 years ago, and it’s been crawling back, and single family starts are rising. Housing starts are up year after year, after year, but even with the latest data for 2019, housing starts are still well below the level that we need just to keep up with the amount of household growth areas in the United States. That means that over time, it creates like almost like a shortage, a limited number of homes available on the market for either buying or even for renting.
Kathy: Is the housing shortage affecting both home buyers and renters?
Frank: It is but you probably feel it more if you’re a home buyer, and that’s one reason we’re seeing home prices rise more quickly than rents. Rents are up too. For example, we measure a single family rent growth, rents are up 3% nationally over the last year. That’s compared with inflation running about 1.5% over the last 12 months. Rents are rising twice as fast as inflation, but if we look at house prices, house prices are rising even faster than rents. In the last year, house prices have been up about 3.5% to 4%.
U.S. Needs More Single-Family Homes
Now, when we look at the rental market, at least there’s been a good amount of multifamily apartment construction. Over the last three years here in the U.S., builders have built about 1 million rental homes in apartment buildings. That’s the largest number of rental homes in apartment buildings built in 30 years over a three-year period. We are producing a lot of rental homes but still vacancy rates for apartments are at 30-year lows, and that’s one reason we’re continuing to see rents rise. When we look at the for-purchase market, it’s even more severe. We’re not building enough new single family homes. We’re not building hardly any condominiums in high rises nationwide. That’s the reason the inventory of homes available for sale is at the lowest level in 30 years.
Kathy: Wow. Do you have any concerns about overbuilding in the multifamily sector? Is there a lot more units coming on over the next three years, say?
Frank: It does look like we’re going to continue to see a good clip of a multifamily production over the next year. We’ve been running at about 340,000 multifamily apartments completed each year over the last three years, and I think we’re going to see about the same number come online here in 2020. We’re going to continue to see that flow of new multifamily apartments coming into the marketplace. I think there’s going to be sufficient demand because all the new young families are households that are being created and looking to find shelter.
Many of them might want to buy a home, but they see prices are really high and they find that there’s not much inventory to choose from. And so for many of them, they’re going to end up choosing to stay in rental homes a bit longer.
Multifamily vs. Single-Family
Kathy: Now, I didn’t prepare you with this question and you don’t have to answer it, but if you were gifted $1 million and you had to invest it in real estate, which would you choose? Would you go for multifamily or single family, given the lack of single family out there?
Frank: Well, I think residential property is going to do actually pretty well over the next several years. About a year ago, I took a look at what the total rate of return was for investing in multifamily apartment buildings, compared with investing in single family homes. It actually turned out that the total rate of return was about the same over the prior five years. I think over time we’ll continue to see that residential property, whether it’s single family or apartment buildings, we’ll probably have about the same rate of return.
Now when you compare it with non-residential, there’s some big differences out there. I’m a little bit worried about retail over time simply because so many more buyers are now buying online. We see the growth of e-commerce. I’m a little bit worried about retail as a sector to invest in. I don’t think it’s going to fare quite as well, but I think residential property is going to do pretty well regardless of whether it’s single family or multifamily.
Kathy: Great. Oh, good to know. All right. Are there certain areas that are growing faster than others where there’s more of a need for housing, whether it’s rental or for sale?
Frank: Well absolutely. That’s true. It’s a continuation of a trend that’s been going on for a couple of hundred years here in the United States. Namely, the population is moving from the Northeast and from the Midwest, and moving South, and moving West. That trend has continued. In the latest data we got from the US census Bureau for population in 2019, what we saw was that the States that had the biggest population increase in terms of number of people were Texas, Florida and Arizona.
Population Growth in South, West
If we look at what States had the fastest percentage growth in 2019 compared with 2018, it was Idaho, Nevada and Arizona. And the two States that lost the most population in 2019, they were in New York and Illinois. Again, a continuation of a trend that’s probably going on 150, 200 years where population in the US is gradually moving from the Northeast, Midwest, shifting South, shifting West. When we look at new home construction, the two largest markets in the US in terms of new single-family construction, are Dallas and Houston Metro areas. Both of them just topped the list by far.
Just in 2019, the Dallas and Houston Metro areas, each one of them had 32,000 new single family home sales, newly built single family homes. Those are the two big markets. If we looked at the markets and round that, the top 10 for them are in Texas, a couple of them in Florida. Those are some of the big markets where people are moving to. They’re moving there for affordability, for job opportunity, for outdoor amenities.
Kathy: I didn’t hear Atlanta on the list.
Frank: Actually, Atlanta I think was in the top 10. Yes, Atlanta was in the top 10 as well.
Kathy: I thought it might be interesting. We’re in the home building business as well and we’ve been building in Reno and in Tampa, and in actually Bozeman, Montana where we’ve seen a lot of growth. In fact, I just got our quarterly update on that. We already have people wanting to buy homes and we’re just breaking ground. Demand in places we didn’t even really– one wouldn’t expect and not necessarily on the map of demographic growth.
Frank: I tell you, one of the top markets has been Boise. Boise is booming. People are moving there from California, some from Washington State. They’re moving to Coeur d’Alene, which is a little bit further North in Idaho, and they’re moving to Boise. Boise is a market where we saw 10% house price growth over the last year. That’s how strong and vibrant it is. That’s even with a lot of new single family construction, prices are still going up by about 10% last year on existing properties.
Kathy: Would you say that’s retirees?
Frank: Well, some of it. Some of it is people who are moving there for the outdoor amenities. Some of them are moving there because it’s a bit more affordable than what they’re accustomed to maybe in the San Francisco Bay Area or down in Los Angeles, and some of them are moving there for the job opportunities. We’re beginning to see some of the tech companies diversify out of Seattle, out of the San Francisco Bay Area, out of SoCal, and they’re looking for more affordable places to locate their activity. Some of them are moving to Boise, some are moving to Colorado, some are moving down to Dallas and Austin, Texas.
Market Metrics Are Changing
Kathy: It seems like metrics are changing. I’ve always said, “Follow the jobs, follow the population growth and affordability,” but it seems like these days, people more and more can live anywhere because they can work remotely, and there’s a whole lot of people retiring, and they can literally live anywhere. What they’re really seeking is a good life and they don’t need a job. They’re looking for a place where they don’t need a job, where it’s affordable, right? It changes, at least what we’ve been looking for, which is primarily job growth, but of course, that’s still a great metric, but what are your thoughts on that?
Frank: Job growth is important. The local community needs to have a variety of amenities that are attractive for the style of life that people like to have. That’s one thing that’s attractive for many of the communities in the south, and even up in the mountain states as well, because there are a lot of amenities, outdoor amenities. Some of these states actually have no income tax, and so they are a little bit more affordable as well. That’s been attractive to higher income, higher wealth individuals, and for some seniors who are concerned about their income cash flow in their retirement years.
Kathy: Yes. All right. Do you have any concern about the article that came out saying there would be a plethora of homes available once the seniors die? It was like a million or something. What are your thoughts? It seemed more like trying to attract headline rather than actual news. What are your thoughts?
Frank: Well, that is my thought. Stories like that do come around periodically, but there are far more younger folks in the population than there are older folks. For example, life expectancy in the U.S. today nowadays is 79 years. I took a look at the size of the population here in the U.S. between the ages of 75 and 84, so centered right around 79. That’s about 15 million folks here in the United States. Then I compared that with the number of prime potential first-time homebuyers aged 25 to 34. Again, a 10-year range of ages, just like for the older population. In that 25 to 34-year range, Kathy, there were 46-million Americans in that range. More than three times the number of Americans aged 75 to 84.
Again, I’m not saying everybody who’s 75 to 84 are suddenly going to die tomorrow or next year, but even that should happen, there’s still not enough homes for all the young millennials who are looking to transition into single family homes. Now, one question is the location of the homes. Well, many seniors have moved south to warmer climates. Often, it’s Georgia, Florida or it could be Arizona, or toward the west, or in Nevada. There are still a lot of seniors who are still living up north and it may very well be that when their homes become available and come on the market, that may be in a market where a lot of young millennials are not living today.
Maybe they’ve moved out, maybe they’ve moved to the big tech centers, where there’s a lot of job growth. Maybe they’ve moved to Austin, Texas. If you’ve got a senior who puts their home on the market in Chicago and yet you’ve got the millennial living down in Austin, Texas, that doesn’t necessarily help the millennial in Austin who’s looking to buy a home. There is a little geographic mismatch in terms of where seniors and millennials are living, but still, even if we saw everybody in that 75 to 84 age range put their home on the market tomorrow, that still wouldn’t be enough homes for all the millennials who are out there looking to transition into home ownership.
Kathy: Yes. Do you think this lack of supply is because we have such a large millennial generation, and we have such a large baby boomer generation that’s living longer and healthier, and staying put, so people just aren’t putting their homes on the market the way they used to? Is that part of the problem?
Two Factors Drive Housing Shortfall
Frank: Well, that’s part of the issue, absolutely, yes. We have a relatively healthy baby boom cohort that is staying in their homes longer. We’ve seen that in the data as well. The median number of years that an owner occupant stays in their home has increased by four years over the last decade. When you look at all of the homeowners in the U.S., the biggest portion of them are baby boomers. They are aging and they’re deciding to stay in place longer, and in general, they’ve been healthier too. That’s certainly one issue. We see less homes coming on the market from baby boomers who are looking to sell their home and move somewhere else.
But the other big factor is just new production. It’s supply. We’re just not seeing enough single family homes being built. We’re running short by about a couple hundred thousand single family homes a year. After several years, that really adds up. We’re usually down a million to 2 million single family homes relative to what we should have in order to meet the growth in millennial families, who are looking to move into single family homes.
Kathy: Well, it sure makes me happy that we are in the homebuilding business, but what we have had to do is shift a little bit on some of our strategy. In Reno, we had two different developments, one higher end and one more affordable. Higher end sales really slowed down, the affordables are moving quickly, so we’ve really just redesigned everything to be more affordable. I imagine you’re seeing that across the board.
Big Demand for New Affordable Homes
Frank: Yes, absolutely. That’s really been the trend over the last three years or so. Developers are looking to add more affordable units because that’s where the strong demand is. For example, on single family, we saw increases in the square foot of space, living space, in new single family homes, up to about three years ago. Over the last three years, the average new single family home being built is a little bit smaller each and every year. That’s directly trying to address the need to have more moderately priced new construction, new supply in the marketplace to meet that need.
When we look at house price growth nationwide, I mentioned in 2019, it was about 3.5% in our national index, but when we look at it in our CoreLogic home price index by price tier, where we separate out lower-priced homes compared to higher-priced homes, the fastest price growth is in that lower-priced segment, where price growth is much faster than 3.5% over the last year. It’s more like 5% or faster in that lower price tier. That’s because there’s such strong demand from millennial first-time homebuyers and such limited supply available on the marketplace.
Not only that, Kathy, but you know the first time homebuyers are looking to buy? They’re competing with single family investors who want to buy those homes as well. You have millennial first-time homebuyers bumping up against demand coming from single family investors, and they’re all trying to outbid each other for the same type of moderately priced home.
Kathy: Now, would all this housing demand and household formation slow down in a recession, and do you see one coming? I know that’s a question you hear all the time.
Frank: I don’t see any recession here in 2020. In fact, what we expect is that the economy will continue to grow at about a 2% clip. What does that mean? That means the economy will grow quick enough to create lots of jobs, then I think it might even nudge the unemployment rate a little lower. Right now the unemployment rate is 3.5% nationwide. I wouldn’t be surprised if we see it move down a 10th, maybe even two tenths of a percentage point during the course of 2020, but business cycle has never been repealed.
It will definitely have a recession at some point. I don’t know if it’ll be 2021 or 2022.
I’m pretty certain it will not be in the coming year, but at some point, there will be a recession maybe a couple of years from now.
When that happens we generally, do see a slowdown in household growth, that is the number of people who form households. That’s usually related to the fact that the unemployment rate goes up, people have less cash in their pocket in order to afford to either rent a home or to buy a home. They choose to live with their roommates or live with family members, oftentimes it’s kids moving back in with parents. That’s typically what we see during a recession, some slowdown in the rate of growth of new households.
Kathy: Is there a way to protect yourself from that potential slowdown if you’re owning a bunch of rental properties? Do you have–
Choosing Residential Investment Properties
Frank: In my mind, if you’ve made decision to invest in residential investment properties, the better quality residential investment properties are the ones that would be more likely to retain tenants, and have a lower vacancy rate. Looking at the multifamily space, if you have a Class A or Class B property, I tend to think they’ll probably outperform Class C properties. If you’ve got a single-family home or probably a building that’s closer in to the downtown with a shorter commute to where the jobs are, that’ll probably retain value better than a rental home that’s at the fringe of the urban area with long commute times.
That would be my hunch of what we’ll most likely see because that’s really what we saw during the Great Recession. It’s the homes that were on the edge of the metro area where there had been a lot of new construction, those are the ones that lost value the most and were slowest to recover in value once the economic recovery took off.
Kathy: People do tend to rent more in a recession it seems. Do you see some of these headlines that we’re becoming a renter nation and do you believe that to be true?
Frank: I see those headlines but the homeownership rate is still 65% in the United States, and it’s actually increased over the last couple of years. I’ve looked at a lot of these surveys of attitudes of Millennials where the surveys try to get into the head of Millennials, what are they thinking? What’s their attitude toward shelter, toward renting versus owning? My read on it, Kathy, is that the Millennials have the same desire to be homeowners as their parents did. They just have a recognition that they may transition into homeownership at a little bit later age.
Maybe their parents became homeowners in their late 20s, for Millennials, it might be mid-30s might be late 30s before they transition into homeownership. The median age of a first-time homebuyer today nationwide is 32, but in some high-cost markets, it’s a lot higher, like in California where housing is very expensive, the median age of a first-time buyer is 35.
Kathy: Seems still pretty young considering–
Frank: Still young but there aren’t a lot of first-time homebuyers in California.
Kathy: It’s true. A lot of people have said that Millennials are behind, that they’re not building wealth as quickly as their generations before them, but I often say, “They’re going to inherit all that [laughs].” When I say that, I had two people come up to me at a last event, and they both inherited quite a lot of money and didn’t know what to do with it. Do you think that’s what we’ll see, the Millennials coming around and inheriting property, and money to buy property?
Frank: I tell you, the baby boom cohort is the wealthiest cohort that we’ve seen in the United States history. I think they have a bequest motive just like other cohorts, and so they’ll be leaving a lot of wealth to their kids, and many of their kids are Millennials. I think that probably is a part of the equation, part of the challenge for young families today. It’s also the amount of consumer debt that some of them have taken on. There are a lot of stories about student debt, and student debt is now $1.5 trillion in the United States.
Managing Student Debt
For those students who took on student debt but have something to show for it, they have their bachelor’s degree, they have their master’s degree, or maybe they took out a lot of debt and became lawyers, and medical doctors. For those, the promise of the return from all that investment in education in terms of higher income for many years to come, and by far are very likely they’ll be able to service the student debt as well as mortgage debt when they finally choose to buy a home. What I’m more concerned about are the young people who took on student debt but didn’t complete a degree.
Whatever issue came up, they weren’t able to complete college. They don’t have that promise or that hope of higher-income earning capacity over time, and yet they’re saddled with this debt they took on. For them, it’s going to be just that much more difficult to not only service the debt, but even if they can successfully service student debt, you’re really going to have the leftover income flow to actually take out a mortgage. For them, it may actually be even far more difficult to transition into homeownership.
Kathy: That’s not the only debt to be looking at, there’s the auto debt, and the credit card debt, and, of course, corporate debt [laughs].
Frank: All right, you’re absolutely right Kathy, student that is just one part of it. The auto debt is almost the same size, it’s $1.3 trillion. Then if you add in consumer credit, credit cards, and the rest of consumer credit, that’s another $1.3 trillion. There’s over $4 trillion in consumer debt outstanding in the United States today, that’s a lot of money.
Kathy: That really blows the debt to income ratios. Now, I just read that the guidelines are changing with the DTI, the debt-to-income ratios, maybe to be able to accommodate all those debts. Have you heard anything about that?
Changes to the Qualified Mortgage Rule
Frank: There’s a lot of things at play right now because the Consumer Financial Protection Bureau is revisiting its qualified mortgage rule that it promulgated six years ago. They’re revisiting it and some of that regulation has to do with the maximum debt to income ratio that lenders can underwrite mortgages to. Some of this is influx and we’ll have to see what happens when the Consumer Financial Protection Bureau puts out its new rule for how lenders can treat debt to income ratios and underwriting. They’ll be putting out this new rule I suspect sometime over the next several months, certainly within the next year.
Kathy: Interesting. Well, our time is up. Thank you so much for the wealth of information you provided today and also ongoing. It’s really helpful for those of us trying to figure things out here.
Frank: Thanks so much Kathy for having me on today, it’s been a pleasure speaking with you as well.
Kathy: I really appreciate it and hope to have you back soon.