Mid-Year Updates: The Future of Housing – a “Bright Spot” in the Economy

By Paige Waltman

Thank you to NBKC Bank for sponsoring this economic update.

Our industry started 2020 off strong. When Covid-19 hit, the entire world had to reset its expectations and forecasts. As we begin the second half of 2020, KCHBA provided both national and local virtual economic updates to help members with their business planning. Robert Dietz, chief economist at the National Association of Builders provided a look at the national outlook while Chris Kuehl, managing director of Armada Corporate Intelligence, provided a more local economic perspective.

A Covid-19 Economy

Both Kuehl and Dietz forecasted a strong economy in 2020 before Covid-19 lockdowns went into effect.

“There was nothing about the economy in January, or even February, that was suggesting we were in any trouble at all,” Kuehl said, noting that the U.S. was looking at a GDP growth of 2.5-2.6 percent for the year. “Unemployment numbers were astonishingly low at 3.5 percent. We were expecting a pretty good housing year. We were expecting a pretty good year in most everything,” said Kuehl.

No one anticipated a 32 percent decline in GDP for the second quarter, according to Dietz.

Kuehl highlighted the nature of the “small business economy” present in the U.S., “more so than most countries in the world. If you look at Japan or Germany, or even the UK, these are countries that are more dominated by their large businesses in terms of contribution to GDP, number of jobs and even local impact.”

Small businesses are more vulnerable to the impacts of Covid-19, and this can include builders and suppliers. A strong word of advice from Kuehl is developing a strong relationship with your bank if you don’t already have one. “The most important relationship you have during a situation like this is your bank… [it’s] the only thing that is going to keep a lot of businesses afloat during this period.”

According to Dietz, we’re looking at about a two year recovery to get back to the economy we had in February. And housing is expected to play a major role in getting there. Dietz noted housing is now about 16 percent of GDP, up from 14-15 percent in recent years.

Housing is one of the “bright spots for the overall economy,” added Dietz. “If [the government is] looking for sectors that can help recreate jobs and foster economic growth, it really is in housing, homebuilding and remodeling.”

Kuehl agreed that the “housing market was expected to have horrific problems” amid the pandemic, but that has not been the case, at least on the residential side. Commercial and public building have been hit the hardest. And Dietz predicted non-residential construction will take four to five years to fully recover.

There is cause for cautious optimism for the remainder of 2020. Dietz anticipates growth in the third quarter. Some economists are estimating as much as 20 percent, but Dietz stays closer to 7 percent due to the “start and stop” nature of reopening.

“For the year, we’re expecting about a -6.8 percent decline,” said Dietz. “In 2021, we think we will get 4 percent back.”

And despite notable failings in other areas of government, Dietz said the Federal Reserve has done an “A+ job” during this recession. “They’ve acted as the lender and buyer of last resort. They have prevented a liquidity and a solvency crisis. And through their actions we have a low interest rate environment.”

Unemployment and Housing

“When the unemployment rate goes up, people are usually not looking for homes,” said Kuehl. But almost nothing is typical about 2020. Unlike the Great Recession, “this recession has really focused on the low-wage worker. Most of the population has not been affected by the layoffs because these were not economically driven layoffs. These were layoffs by edict. Most businesses that have not been desperately effected by the lockdown have continued to work like they always have,” said Kuehl.

With most of the job losses in hospitality, retail and service, “this is impacting renters and younger households more. This will have a disproportionate impact on certain parts of the housing market,” reported Dietz.

Although the construction industry is experiencing a job shortage, the newly unemployed are largely unskilled for the market and would require extensive training, according to Kuehl. As with any hands-on industry, virtual learning is not an ideal way to teach these skills. According to Kuehl, 25 percent of the population are kinetic learners, which means they learn by doing, and online training is only effective for about 10 percent of people.

When analyzing unemployment data, education should always be considered, according to Kuehl. He believes education has become more important than ever. Before Covid-19, those with bachelors degrees faced about 2.2 percent unemployment. Those with an associates degree had a 2.8 percent unemployment rate.

“That gap used to be much, much greater,” said Kuehl. Not too long ago, Associates degrees had a similar unemployment rate to workers with a high school diploma, clocking in around 4 percent. Overall, according to Kuehl, Associates degrees have become stronger and the weight of a bachelors degree has weakened.

Current Housing Trends

Builder confidence is now back to the same level it was pre-recession. For 2020, according to the Housing Market Index, there is a 12 percent decline in single family starts nationwide. Dietz notes this is not unusual for a recession, but the trend is moving in a positive direction. Dietz predicts that negative 12 percent will end up closer to negative 5 percent come year-end.

Fortunately, Kansas City did not follow this trend. Dietz notes, according to local MSA data, Kansas City family home starts are up 20 percent compared to the first half of 2019. Kuehl is surprised by the number of housing starts. After a collapse in April and May, there was a definite rebound in June that carried through July and August. “We saw a 20 percent increase in starts and a 20 percent increase in existing home sales,” said Kuehl.

“There are a lot of pockets of strength, like Kansas City, throughout the country,” said Dietz, pointing out the higher density areas are the ones struggling.

“We really didn’t even get the dip that was occurring in other parts of the country,” said Kuehl.

Dietz noted 47 percent of single-family construction is currently in low density markets – a geographic trend he predicts likely to persist even after a Covid-19 vaccine. Within that single-family market, only about 4 percent is built for rent. Dietz predicts this could get up to 6 percent in the near future. Custom home building is also expected to take a larger market share of the single-family market. Currently at about 20 percent, Dietz forecasts a rise over the next few years, possibly topping out at 30 percent.

Kuehl reported the stock market bouncing back has been good for the higher-end buyer. And mortgage applications are up 20 percent compared to just one year ago, even in the midst of a housing shortage. The country has about a five month supply, when “we basically need about five and a half to six months to be a normalized market,” said Dietz.

And while the demand keeps growing, that does not mean the houses are. “New home sizes have been falling for the last four or five years. Mostly because we were building more entry-level housing,” said Dietz.

However, Dietz forecasts this trend ending soon, with house sizes levelling off and then rising a bit. This is likely due to an increased demand for home offices and more space needed for family members moving in, along with pets being a priority. The aforementioned reasons could also help explain the 7 percent growth in remodeling for 2020.

Two areas that have not been seeing a steady rise are townhomes and apartments. “Townhouse construction didn’t have a particularly good year in 2019,” said Dietz. But there is potential, he believes, as townhouses could expand beyond its current 12 percent market share going forward due to redevelopment of retail spaces.

Apartments, however, are the “weak leg of the residential construction sector,” said Dietz. Apartment construction is currently down 19 percent nationally for the year and will likely stay there. Kansas City reflects this trend, standing at a decline of 18 percent. “Housing that contains a public space, such as an elevator, is at a disadvantage,” noted Dietz.

Future of Housing

Kuehl acknowledged forecasting housing trends is not so simple a task. “Housing is local,” said Kuehl. “What happens in Kansas City is not what’s happening in Chicago or St. Louis or in Portland.”

But applying trends and forecasts across one large metro area is also not always accurate. Even in smaller cities, there can be dozens of different housing markets. “We have lots of neighborhoods. What goes on in the area around Basehor and Piper is different than what happens around Blue Springs and Lee’s Summit,” said Kuehl.

Dietz is confident in mortgage rates staying below 4 percent until the end of 2022. Low mortgage rates help combat rising home prices, which has been a trend due to demand and the scarcity in resell inventory, resulting in about a 5 percent year-over-year gain.

“I think some of that is going to soften. That’s a function of the fact the buyer pool is going to be reduced somewhat due to high level of unemployment.”

But don’t expect big price declines like in 2008. Dietz compares the future market to what was seen in the early 2000s. And despite the pool of potential homebuyers possibly shrinking, there was a very strong demand for homeownership going into 2020.

“Until about 2016, the market was really being pushed on the renter’s side. And then in 2016 it switched,” said Dietz. And the data can back this up; the first quarter of 2020 was the “best quarter for home ownership since the Great Recession.”

But there are always factors to be weary of, with Kuehl acknowledging the labor shortage in construction will continue to be a problem for at least a few more years. As jobs remain unfilled and the average age of skilled trades workers continues to rise, the need to recruit in the industry and bring skills up to speed is crucial.

According to Dietz, the construction industry did experience a loss of less than half a million jobs in the spring. But about 70 percent of those jobs came back in the May-July period. Dietz predicts about a year from now the industry will actually have “a larger job base than it did before the recession.”

Another potential pitfall is rising commodity costs, with lumber being top priority. “We have not seen domestic increases in lumber production. We still have tariffs on Canadian softwood lumber, about a third of our lumber supplies,” said Dietz. This year has seen a remarkable set of price gains for lumber.

“At the end of July, we were up $627 per board feet. Early August is now at $670. Since mid-April, lumber prices have increased 90%,” said Dietz.

In the end, both economists seemed upbeat about the future of residential construction both locally and nationally in 2021.

This story was originally published in the September 2020 issue of Building Business News.