MHN Interview: The State of the Housing Industry
New York—The economy is doing better—but is the single housing industry as well? Peter Muoio, head of research at Auction.com, talks to MHN about housing demand and his predictions for multifamily.
MHN: Auction.com recently released several housing reports. What were some of the findings?
Muoio: We reacted in our blog post to three releases regarding the single-family sector: two were on the price side—the Case Shiller and the FHFA Index—and the other was on new homes sales. Together they painted a similar story to what we had been seeing, and a similar story to what we had been expecting, which is continued recovery for single-family housing. On the price side, what we would suggest is a long, moderate improvement. And that [trend] continued with both the data from the FHFA and Case Shiller for the fourth quarter, confirming very similar movements in previous data for home prices that we had seen from both the National Association of Realtors and from Zillow. On the new home sales front, it was actually quite a jump, which is obviously positive news. We don’t want to get overly excited about the size of that jump because there is a lot of noise in home-sales data—especially in the winter months, because if it happened to have been a warmer month, it could have affected the numbers. Fundamentally it continues to show that we are on the upswing for both demand and existing home prices.
This is all great news, and single-family homes are emerging from its long sleep, but I wouldn’t say that we could claim we’re totally out of the woods. We always hear the argument, “The housing market will help to sustain the economy.” Our point is, the housing market’s reemergence at the beginning of the recovery is a reflection of the economy, and it requires that the economy remain favorable for that recovery of housing to be sustained. In other words, some other economic news that we’ve gotten, like the flat GDP and things of that sort, are troubling. We have to wait for all of the information to see if we are indeed in for a slower few quarters of economic growth. If that were to occur, given that we’ve seen taxes raised on more than three quarters of U.S. households, given that government budget cuts that are now in place and are working their way through the system, there are significant headwinds that are hitting the economy. If those headwinds hurt the labor market, it would be unreasonable to expect that the housing recovery would be unaffected by that—it’s dependent on the economy growing, jobs created, unemployment coming down, incomes growing, confidence improving, etc. The economy is not yet at a point where it’s “full steam ahead,” and it keeps going through these periods of weakness and relative strength, and the housing market is part of that process.
MHN: So you said people say the housing industry helps the economy, but that it’s really the opposite of that.
Muoio: There’s a feed-through effect—if housing is doing better, that is one of the things that then contributes in a positive way to the economy, but that can’t happen in a vacuum. If the rest of the economy is negative or is going backwards, we can’t expect that the housing recovery by itself to reverse that story. In the end, housing demand is going to be determined by the rate of household formations. The rate of household formations, while over long periods of time reflects demographic trends, over short periods of time reflects economic trends. We had a very prolonged period during the recession and in the immediate years of the aftermath of the recession we had very depressed household formations. That changed in late 2011 and early 2012, when we saw a significant pop in household formations when the economy appeared to be gaining momentum, and for us that was one of the two fundamental reasons why the single-family housing market did indeed shift gears into its early stages of recovery. But in late 2012 we saw a slowdown in the pace of household formations again, which did correspond with the latest slowdown in the economy. If that’s the case, what I refer to as “organic demand” for single-family homes begins to dissipate as well.
The other important factor for single-family demand is the homeownership rate. What we did see in 2012 was a less-severe downward slope decline in that homeownership rate, and that’s positive for the single-family market. But if that were also to change for reasons having to do with economic growth, or lack thereof, that would feed through to the underlying demand. The underlying demand for housing doesn’t exist in a vacuum. It really does depend on a supportive macro-economic environment.
MHN: What are your predictions for multifamily? Do you think because the single-family market is doing better, that will lower the multifamily demand? Or do you think that’s going to stay steady?
Muoio: It’s not a total zero-sum game. The demand for multifamily comes from two places, as it does for the single-family market. They can both benefit. If the economy gains momentum and stays on track, then both multifamily demand and single-family demand are generated by the increase in household formations. That’s a win-win for both segments, so they’re not fighting against each other there.
The place where single-family and multifamily are on opposite sides of the coin is in the home-ownership rate. Our expectation has been that we’re closer to the end of the decline in home-ownership rate than we are to the beginning. What that is suggestive of is less of a flow from owned homes to rental properties than what we’ve seen, and that would represent to us a simmering down of that source of demand for multifamily. Taking those two major drivers of demand for multifamily units, we expect multifamily demand to remain positive, we expect multifamily demand to remain healthy, but we do expect it to simmer down from the extremely robust rates of recent years that have been supercharged by the sharp decline in homeownership.
MHN: Do you think baby boomers will continue to downsize to apartments, or will the demand come from millennials?
Muoio: The baby boomer idea is a good point. Those kinds of secular shifting are continuing to occur. As the young adults who have been significantly hurt by unemployment continue to get jobs and that unemployment rate dips down—which it has been—that’s a definite positive for the multifamily sector. Those individuals are almost universally going to go into multifamily units. On the baby boomer side, there is sort of a macro or secular trend towards downsizing. The retirement equation used to be you sell your home in the Northeast or the Midwest and you retire to a home in the Southeast or the Southwest, but this has become a bit more nuanced. Some percentage of the baby boomers now are saying, “I’m going to sell my home and move into a central business district in the area.” So that will continue to be a positive mega-trend for the multifamily industry.