martes, 13 de marzo de 2018

martes, marzo 13, 2018

Housing Recovery: There’s No Ceiling in Sight

By Lawrence C. Strauss

      Housing Recovery: There’s No Ceiling in Sight Photo: Getty Images 


The U.S. housing market is still showing strength, well into the economic recovery that began in 2009. While single-family housing starts, which totaled an annualized 877,000 in January, are less than half the 1.8 million recorded in early 2006, before the financial crash and recession, there is ample reason to believe that starts, sales, and prices will continue to escalate.

Recent housing demand has been boosted by a host of factors, including an increase in millennial home buyers, steady job growth, and relatively low interest rates. There are some reasons for concern, notably affordability in certain markets as demand outstrips supply and the cost of mortgages if interest rates rise. For perspective on current trends and the longer-term outlook, Barron’s recently turned to Mark Zandi, chief economist at Moody’s Analytics and a long-time student of the housing market.

Barron’s: Mark, you recently made a strong case for continued strength in the U.S. housing market. Can you summarize it?

Mark Zandi: Sure. The current supply of housing is still well below underlying demand. That supply includes single and multi-unit housing and manufactured housing, such as mobile homes. Give or take, that’s around 1.3 million units per annum, up considerably from the bottom during the housing bust of a decade ago. But that’s still very low, relative to demand, which includes the sum of household formations. If a household forms, it has to live somewhere. My calculation also includes obsolescent housing, which involves everything from housing destroyed by hurricanes and wild fires to normal teardowns.

Then there are second homes, many of them vacation homes. There are many baby boomers with lots of cash thinking about retirement, and they are putting up second homes. Total underlying demand is running at 1.6 million units per annum, at least. That’s a gap of 300,000 units annually, relative to supply, and it is on top of a market that, broadly speaking, is undersupplied. The vacancy rates across the housing stock are about as low as they get. There are some soft spots in the high-end apartment market, but the broad housing market is undersupplied. 

How does the consumer’s health look to you?

The consumer’s health is about as good as it gets. Unemployment is low and falling, there are lots of jobs, and wage growth is picking up. Interest rates are still low, household debt service is near record lows, and confidence is near record highs. The recent correction in the stock market notwithstanding, wealth has increased greatly. There are lots of tailwinds behind the American consumer and the American household.

Mortgage rates have moved up in the past year. The rate for a 30-year fixed mortgage is now around 4.4%, compared with 4% in late December. When will this start hurting demand?

In the grand scheme of things, mortgage rates are still very low. In a normal, well-functioning economy, we should have fixed mortgage rates closer to 6%; that’s where you would expect them to be in the long run. It will take a while to get there. The average outstanding mortgage is firmly around 4%. As long as rates move up to 4.50%, 4.75%, or even 5% because the job market is good and wage growth is improving, it’s no big deal. The market should be able to digest that. The problem is when rates move too far, too fast. Rates rose about 100 basis points, or one percentage point, in late 2013, after Federal Reserve Chairman Ben Bernanke started talking about tapering quantitative easing [the Fed’s asset-buying program, aimed at boosting economic growth]. That did a lot of damage.

Home prices have been rising steadily for the past six years. Is affordability a concern?

Not yet. In the middle part of the housing market, valuation is still reasonable and affordability is good. It is no longer a screaming buy, but it isn’t a sell. Valuation is more of an issue at the high end of the housing market. High-end home prices have risen strongly over the past several years, and are now high relative to household income and effective rents, particularly in global gateway cities where there is a lot of investor money sloshing around.

What other housing factors aren’t getting enough attention?

Immigration matters a lot. It might not matter in a given quarter or even a given year, but over a period of several years, and over a decade or a generation, it’s vital. The key to driving housing demand is households, and the key to household growth is immigration. Natural growth in the population is slowing, because of the aging population. Without immigrants, we aren’t going to see new households, and that means fewer homes will get built, and fewer mortgages will get originated. Fewer homes will get sold, which means a less vibrant market. At the end of the day, the housing market depends on households. If you don’t have households, you don’t have housing. That’s key.

The recent tax-reform package doesn’t let homeowners deduct interest on more than $750,000 in mortgage debt. It also caps at $10,000 the amount that can be deducted for state and local taxes. What impact will these changes have on housing?

They should weigh on house-price growth. There are areas of the country where the taxpayers rely on those deductions–the Northeast corridor around New York, in particular; parts of Florida; around Chicago; and the West Coast, particularly coastal California. Those markets depend on taxpayers who use those tax benefits, which have been capitalized into house prices.

If you get rid of the tax deductions or make them worth less, it stands to reason that it is going to come out of prices. How it comes out of prices is going to take time, but it will come out in those markets, including some places around New York City. However, I doubt prices will decline. Prices in those markets might go sideways for a year or two.

Thanks, Mark.

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