2013 – A New Hope for Housing?
Barring unforeseen circumstances, for the first time since the Great Recession began, it appears that the housing market will finally have sustained growth in 2013, which should boost new housing and thus retail development. This differs significantly from the past several years when the outlook was decidedly uncertain, as various forecasts indicated that the economy, which was supposed to have bottomed out a couple of years ago, was experiencing a bumpy recovery, forestalling progress in new housing and making the environment for new retail relatively inhospitable.
The federal government is a major factor in the recovery of the housing market in two important ways. First, the Federal Reserve Bank has indicated that it would keep the benchmark interest rate near zero as long as unemployment remains above 6.5% and it projects inflation will be no more than 2.5% in the next couple of years. Second, Congress and the President avoided the “fiscal cliff” (at least for now) with a last minute bill (H.R. 8, the American Taxpayer Relief Act of 2012), which permanently extends most of the 2001 and 2003 tax cuts. If those had expired as scheduled, around $600 billion would have been taken away from consumers, which could well have sent the U.S. back into recession.
Another factor that is beginning to have an impact on the housing market is the rapid escalation in rents across the nation, caused in part by the drop in vacancy rates, from 11% at the peak of the recession to just over 8.5% (an almost 30% improvement), meaning that we are nearing the more typical vacancy level of 7% to 8%. In the third quarter of 2012, average effective rents increased almost 3% over the third quarter of 2011, higher in more active markets (such as San Jose [over 4%] and San Francisco [almost 6%]). Further, occupancy rates have recovered to historically normal rates in the majority of markets, an indicator of the improving job market as young adults who had moved back in with their parents when job opportunities were scarce are now finding employment and moving out, the first step to home ownership. All of the foregoing, when combined with the bottoming out of home prices, means that there is strong renewed interest in purchasing homes, as renters seek to maximize the value of their housing dollar. This will in turn reduce the inventory of vacant houses, a major contributor to the lack of new housing construction.
However, improvement will be somewhat tempered by the overall make-up of housing, which may have, at least for the near future, been altered due to higher gasoline prices, the emphasis on “walkable” neighborhoods (for a moderate income family, getting rid of one car can result in a 10% to 15% increase in disposable income), and the fact that renters are more flexible in adapting to the rapid changes in the job market, having much less money tied up in what has traditionally been the single largest investment for an American family – their home. While new housing construction is on the rise, much of it is for multi-unit apartment buildings intended to be rented – the pace of multi-family construction starts in 2012 was double what it was in 2009 and 2010, and the ratio of multi-family rental units to single family and for sale condominium units is changing.
In addition, the lack of new home building for the past several years is now adding to the strength of the recovery of the housing market, as demand is starting to outstrip existing supply, making it more feasible to invest in new housing construction. In 2012, there were about 600,000 units built, and for 2013 that number is projected to increase to around 750,000, with new housing starts anticipated to be in the 1,000,000 range (according to the federal government, seasonally adjusted rates for private housing starts in November 2012 increased to 861,000 over November 2011’s 708,000, and home building completions rose 16%). It is estimated that the annual need is between 1,400,000 and 1,500,000, so the unsold inventory should start dropping. While the current pace is far less than the 2,500,000 from 2005 (which the past half decade has shown is unsustainable), it is far better than in prior years.
The economy continues to improve, with the Federal Reserve predicting 3% growth for 2013 (note that some commentators are more cautious, suggesting that growth will be around 2%), with the recent history of significant swings in gross domestic product growth rate in the past four years being replaced by slow but steady improvement. Unemployment is falling, from around 9% nationally at the end of 2011 to about 8% by the presidential election, and is expected to drop to 7% by the end of 2013. While the decrease in unemployment has not occurred as fast as many had hoped, the cumulative effect is still enough to make continued job growth a strong likelihood, which will further bolster the ability of consumers to purchase existing homes and thereby increase the incentive to build new homes. Added to that is the fact that the overall financial well-being of Americans has improved significantly, with collective debt in 2012 down to $11.3 trillion from $12.7 trillion in 2008, meaning that there is significant additional wealth to invest in houses.
A number of commentators have noted that the housing market is now having a positive impact on the overall economy, a welcome reversal from the last four to five years, when it most certainly had a strong negative effect. Based on the Federal Reserve’s commitment to keep interest rates low, it is likely that even if interest rates were to rise, that would most likely be because there is positive economic growth, leading to an improving job market (always a critical factor in home purchases), so the outlook is generally positive. As with 2012, though, the impact of international events may temper growth in the U.S., particularly the continuing problems for European economies and the slowing of growth in China, Brazil and India.
Nationally, new home sales rose in 2012 on a more consistent and stronger basis than in prior years, with pending homes sales up almost 10% in November 2012 when compared to November 2011. Some positive statistics are first, that the inventory of unsold homes was reduced in November 2012 to 4.7 months worth, the 5th month in 2012 at that level, all of which were the lowest since 2005, and the normal housing vacancy rate of 1.5% is also being approached, having dropped to 2.1% from the high of 3%. Further, the National Association of Home Builders anticipates that new home sales will increase substantially in 2013. In 2012, sales of newly-built homes rose 4.4%, the highest level since the first home buyer tax credit ended in April 2010. According to the Los Angeles Times, sales of never occupied homes are up almost 22% over a year ago, with overall home sales at their highest level since the tax credit in 2009 and 2010, all of which will contribute to new retail development.
Home prices are continuing their upward trend, with the median price up 10% to 15% over last year’s figures (although some of this may be due to price increases in construction materials). The S&P/Case-Shiller index of home prices showed an overall gain in home prices of more than 4% over the past year, with gains in the vast majority of the markets it analyzed. Of particular interest to California home builders and retail developers is that housing prices in the state have seen some of the strongest gains in the nation, welcome relief after California (along with Nevada, Arizona and Florida) suffered so much during the downturn. Two years ago, over a third of the metropolitan areas with the largest drops in housing prices were located in California; now, California metro areas are leading the way in increases. The Los Angeles Times reported in late December 2012 that the median prices of all houses and condos in California rose over 19% when compared to a year ago.
Finally, foreclosures (and their brethren, short sales), one of the biggest drags on the housing market during the recession, continue to fall as a percentage of the overall sales volume, which will also boost home prices and demand for new housing. As the Los Angeles Times reports, sales of foreclosed homes are down to around 17% of all sales, half as much as in November 2011 and the lowest level since October 2007 (recall that in prior articles it was noted that the figure was 59% in 2009, 38% in 2010 and about 33% in 2011). Nonetheless, the California Association of Realtors cautions that it may take a few more years for the California housing market to fully recover, particularly since the Central Valley and Inland Empire still have large amounts of REO properties and continue to have higher than normal foreclosure rates.
In summary, for the first time since 2007, it appears that there is reason to be optimistic about housing generally in 2013, which should bode well for new housing construction, which in turn (and in time) should boost retail development to a level that has not been seen in some time, though probably not to level the experienced in the boom years of the mid 2000’s. Unfortunately, the cost of transportation, both in dollars and in time spent commuting, will probably continue to dampen the attractiveness of far-flung housing developments that characterized the mid-2000s, meaning that new shopping centers in the exurbs – one of the traditional pillars of retail development – will probably be the last category of retail to recover. So, while there is no doubt that the rate of new home building is not keeping up with the increasing demand, it is likely that the best opportunities for retail development, as in the recent past, will be in areas that have existing housing stock to fill. Once there are jobs to support new construction in outlying areas, new retail centers will again be needed.