A few weeks ago, I attended a conference where I heard economist Elliot Eisenberg, Ph.D., expound on our growing but ambivalent economy. On the positive side, we have record low unemployment, so more consumers can buy stuff, and household formation is rising. On the other hand, wages remain surprisingly stuck in recession lows. We also have record low debt, which is good, but it’s practically impossible to get a construction loan, and difficult to obtain a mortgage, so the low interest rates have not had the historic effect of setting off a homebuilding boom.
In another contradiction, conventional wisdom holds that the market moves from the bottom, with entry-level homes selling fast and furious, creating the traditional move-up escalator, with homes priced below the median selling, allowing first time buyers to become second time buyers, and then existing midrange homeowners to obtain the equity needed to move uptown. But it’s not working this way today. It turns out that the highest end of the home market and remodeling are outperforming all other aspects of the real-estate economy, except multifamily homes.
Who Says So?
Dr. Eisenberg speaks in rapid sentences, streaming a steady and staggering array of financial facts and figures. In public appearances, he illustrates obscure economic relationships with clever graphs and charts that make the complex cause and effect of the macroeconomics simple to understand. He uses humor, sometimes piquant, but always entertaining. Nicknamed the “Bowtie Economist,” due to his signature neckwear, Eisenberg is a former Senior Economist with the National Association of Home Builders in Washington, D.C., and the creator of the multifamily stock index. He sits on the Expert Advisory Board of Mortgage Market Guide and is a regular consultant to several large real estate professional associations, hedge funds, and investment advisory groups. His research and opinions have been featured in Bloomberg, Business Week, Bureau of National Affairs, Forbes, Fortune, and many other publications. He is a regularly featured guest on cable news programs, talk and public radio. You can subscribe to his daily, 70-word economic blog at http://econ70.com/.
I was curious to ask Dr. Eisenberg some specific questions about homebuilding and remolding in today’s economy, so I called him. After juggling his heavy speaking schedule for several weeks, we connected. Here’s what he had to say:
The New-Home Reality
In decades past, residential construction was a huge economic element, as much as 30% of the Gross Domestic Product (GDP), now it’s only a shadow of what it was, less than 10%. But still important. We do have a clear economic recovery, and residential construction has improved dramatically, but not all sectors. Multifamily has done very well. Rental housing has not been strong as it is today since the early 1970s. The annual rate of multifamily construction in 2015 surpasses 400,000 units, and up 28% from last year.
Meanwhile, single-family construction, which has also improved, although only 12% since 2014, remains stuck at recessionary levels of just over 700,000 units on an annualized basis. We’re well out of the recession, but housing has not been this low (when not in recession) since the 1960s.
Some Fundamentals Have Changed
The characteristics of the current market are very different than in past recoveries. Multifamily picked up dramatically, but it’s not condos or even cheap apartments, it’s now delivering very high end rental apartments. The single family market is focused on the high end, too. So the prices have recovered, but the numbers have not. Everyone is building for the wealthy.
Traditionally, the market moved from the bottom, first time buyers. But nowadays you have young folks with very heavy levels of student debt, and it’s harder than ever to get a loan. So the traditional move up pressures are now leveraging move up multifamily, where income matters more than perfect credit. The trend today is for high end apartments. But this can’t go on forever, and what I expect to see down the road is something very different. I expect to see people move away from the big city costs toward more affordable areas with economic sustainability. You can see this even now, where the south and the west are doing especially well. Folks want to live where it’s cheap and the weather is nice. You’ll find residential growth in those areas, such as in Tennessee, Georgia, Kentucky, North Carolina, and South Carolina. These are good places to build today.
In general terms, the small town housebuilder that used to represent a major homebuilding block has declined to roughly half of what it was. Meanwhile, single family construction has not fallen by 50%. This is not the roaring recovery that we used to experience and the small, new home builder has not seen a recovery at all.
There is still a tremendous, pent-up demand in first time buyers. First time buyers typically represent over 50% of the new home market, but it’s dipped to a 27 year low of about 28% of the current market. This is crazy low, but builders cannot find a way to meet the demand for first time homebuyers. The rules now push builders to build costly homes. Zoning requires larger homes with high end exterior finishes, and stricter building codes that add structural costs creating strong upward pressure on building prices. It’s almost impossible to build affordable housing. With costs increasing, wage growth anemic, and loans impossible to obtain, low end single family housing suffers all the scars of the post-recessionary economy. The largest market sector-or perhaps the only viable market remaining, is catering to the rich.
Remodeling Remains Strong
The remodeling industry didn’t have a big bust, it went down, but it’s improved a lot. If you look at GDP, for roughly the last 20 quarters remodeling has exceeded new construction. Remolding’s right back where it was in the late 1990s. Another significant bump in activity should come soon, as wages begin to pick up and new construction costs remain out of sight, remodeling will continue to get better and better. But for those builders that want to transition from homebuilding to remolding, it’s very tough. It takes very different skills and a very different type of organization.
Advice for Your Business
Green building is here to stay, it’s like organic food, and it means “better quality” in the consumer’s mind, not just ecology. In the long run, the millennials come with have an idealistic view of consumption, they want to give something back. It’s important to them. They want psychic and social value, as well as economic.
The millennials are slower moving cohort than the baby boomers, but larger, and in a couple of years they will be the biggest labor cohort ever, and they will take over and redefine the country, including housing. So find out who they are and what they want. Start talking to 20 year olds today.
Right now, builders and remodelers would do well to focus on the highest-end product possible in their respective markets. Who can afford these products? Older, married buyers. Your best bet are married lesbians in particular, due to the fact that men-sorry to say-have become a net drag on today’s economy.
To grow or remain cautious? That’s a great question. The economy is growing, and will continue to grow. But it’s also a harder and riskier to do business nowadays; there’s a lot of uncertainty. So push advantages you already have. If you own land, push it. If you have access to financing, use this advantage to the maximum. Push what you already have. A recession could come in a year or two, so don’t risk the balance sheet, don’t overextend, but the sector is growing, so you should be able to grow, too. The barriers to entry are higher than ever, which means if you’re in the game, you will be able to take advantage of it. There is no real competition form upstarts, since 2005 we have very few new builders. A generation has been lost. So don’t reinvent the wheel, but don’t stay in the comfort zone either. Stretch, but just a little.
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Elliot Eisenberg, Ph.D. is a nationally acclaimed economist and public speaker specializing in making the arcana and minutia of economics fun, relevant and educational. A former Senior Economist with the National Association of Home Builders in Washington, D.C., Eisenberg is the author of more than eighty-five articles, serves on the Expert Advisory Board of Mortgage Market Guide and is a regular consultant to several large real estate professional associations. His research and opinions have been featured in Bloomberg, Business Week, Bureau of National Affairs, Forbes, Fortune, and many other publications. He is a regularly featured guest on cable news programs, talk and public radio.
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