Why there’s no bubble in the US housing market
Comparing the current US housing market with its performance in 2008, where sub-prime mortgages reigned, Doug Donald, Walton Global Investments senior vice president, real estate acquisition and disposition, says today’s market is more disciplined, driven by strong US economic indicators and jobs growth. In an interview with AsianInvestor, Donald outlined his reasons for believing that US demographics and real estate trends will sustain ongoing positive market performance.
Q. Looking at the US housing market, are we headed for another bubble?
Not anytime soon. The US housing market is on solid ground, well supported by consistent growth, strong demand and a business-friendly regulatory environment. The expanding economy creates strong drivers for home ownership, with builders in many regions of the country unable to keep up with demand.
Looking back to the 2008 bubble, we saw an overheated market with an over-supply of new homes combined with widespread subprime mortgage financing. Some regions in the US recovered quicker than others after the global financial crisis (GFC). However, from a national perspective, construction and housing permit issuance has only recently started to approach historic average levels.
That stated, there is still a long way to go until permits and construction meet existing and pent-up demand for housing. Learning from previous mistakes, home-builders are more disciplined now and are not getting ahead of themselves with speculative inventory. Today, it’s supply side challenges such as labour shortages, strict mortgage qualification standards, and congested permit approval processes that present the biggest challenges to the housing market.
Q. What’s driving today’s market?
The fundamental drivers of the appetite for land absorption are job creation, population growth, housing permit issuances and housing affordability – can the median take-home income afford to purchase the median home price. These four highly-correlated factors create a win-win scenario for development.
The pro-business environment in the US has seen a number of diversified economic hubs emerge, which create clusters of job growth. Orlando (Florida) is a good example of this. It’s one of the fastest job growth centres compared with other large metropolitan areas, growing around 4.3% annually as of July 2018 (July 2017 to July 2018).
Other metropolitan areas experiencing an average annual growth rate of over 3.1% are all located in the Sunbelt region – Atlanta (Georgia), Riverside (California) and Dallas (Texas).
Q. How does this regional performance impact the real estate market?
As population growth through in-migration continues to increase in the Sunbelt region from both Millennials and Baby Boomers, a surging demand for expansion of new communities in the secondary cities and well-situated suburbs will dominate the housing market into the next decade.
According to the National Association of Homebuilders, compared with end-June 2017, the US’s West saw the highest growth in single-family permits (+14.2%) while the South of the country had the highest growth in multi-family permits (+13.6%) across the country – all of which are boosting pent-up demand for industry-wide housing production.
Q. How does the current situation in the US housing market differ from 2008?
Unlike previous market drivers from 2004 to 2006, current demand for housing is built on a solid foundation of fundamental growth factors. Based on US Bureau of the Census’ historical data, GDP grew at a rate of 5.4% in the second quarter of 2018, its fastest pace since 2006 with the unemployment rate at 3.9%, the lowest mark in a half century.
Adding to this is a well-performing economy, a solid job market and increased household disposable income. Baby Boomers are on the move and Millennials are starting to form households - all major contributors to the strong demand for home-ownership. However, despite the pent-up demand, industry-wide housing production is still well below historic norms as the builder community struggles with supply-side challenges.
Q. Why are supply-side challenges still occurring?
Home-builder confidence is at its highest level since 1999, even higher than during the housing bubble from 2004 to 2006. However, current housing starts continue to lag behind the starts of the previous cycle.
Stricter mortgage qualifications and supply-side challenges for builders have essentially created a “missing middle” in the housing market. Qualifying potential home buyers for the ‘first and second time move up home’ and solving the supply-side challenges are pivotal in moving current housing starts beyond the levels reached in past performance numbers.
After nearly a decade of absorbing inventory levels created from over building, home-builders and home buyers are regaining their confidence as permits steadily rise and return to 1.3 million per year, the historical average level.
Q. What is your outlook for the US housing market, and which areas will have the strongest performance?
The US housing market is benefiting from the country’s exceptional economic performance, due in part to President Donald Trump’s 2018 tax reforms. Many US corporations are supportive of the current federal government’s pro-business, predictable regulatory environment and job-creation mandate.
This has created strong drivers in employment and population growth and this combination is reflected in the demand for housing and the absorption of land in the Sunbelt region in particular. Many political and economic factors indicate that long-term and sustainable growth will continue in employment, population and housing numbers.
The US housing market is far from becoming a bubble, in fact it is easily characterised as completely the opposite – sustainable, measurable growth based on sound fundamentals, with a significant upside; if mortgage qualifications and supply side challenges can be resolved.