trends in housing - rclco.com · large metros capture an increasing share of job and wealth growth...

TRENDS IN

HOUSING

ULI Spring Meeting 2019

April 18, 2019

Presented by Gadi Kaufmann, CEO

ULI Spring Meeting | 4/18/2019 | 2

Will 2019 be any different than 2018?CYCLE RISK


Record-low number of countries in recession given forecastsCYCLE RISK

Source: IMF World Economic Outlook


Leading indicators point towards a near- or medium-term correction

Source: Federal Reserve Bank of Saint Louis

CYCLE RISK

-3.00%

-2.00%

-1.00%

0.00%

1.00%

2.00%

3.00%

4.00%

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

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1996

1997

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2001

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2005

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2011

2012

2013

2014

2015

2016

2017

2018

U.S. 10-Yr Treasury Spread to 2-Yr Treasury

Since the early 1980s, the inversion of the yield curve

has preceded a recession by 9-15 months


Inverted yield curve is a false alarm

► No recession for the next three years

► Growth will slow from 3% in 2018 to 2%

► Inflation pressures will abate

► The Fed will stay on hold until the end of 2021

► Long rates will stay low

► Bullish for equities

► Solid corporate fundamentals

► Credit spreads are expected to widen in 2019H2 for idiosyncratic reasons

► With US growth slowing and US rates staying low the dollar should depreciate

CYCLE RISK

Torsten Sløk, Ph.D.Chief EconomistManaging DirectorDeutsche Bank Securities


Rising labor costs are driving a rapid increase in construction costs, especially in the largest metro areas

Source: RS Means

CONSTRUCTION COSTS

-2%

0%

2%

4%

6%

8%

10%

12%

14%

0

50

100

150

200

250

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

RS Means Construction Cost Index

Annual Increase (RHS) Cost Index (LHS)


Will 2019 be any different than 2018?CYCLE RISK


Two big demographic trends: boomers and millennials

Source: U.S. Census Bureau

DEMOGRAPHICS

-

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100

U.S. Population by Age, 2018 & 2033

2033 2018

Millennials aging into a life-stage that has

traditionally been defined by family-creationBaby boomer generation

causing an unprecedented

increase in the population of

retirees and seniors

This is why expensive homes in the burbs

aren’t selling


U.S. growth primarily driven by immigration; domestic migration is leaving high-cost gateway markets

DEMOGRAPHICS


Large metros capture an increasing share of job and wealth growth

Post-recession trend is a continuation of a decades long pattern of job growth concentrating in gateway markets and other large metros

GEOGRAPHY OF GROWTH


In recent years, most major metro areas are experiencing faster growth in their suburbs, especially in secondary markets

SOURCE: Brookings Institute

GEOGRAPHY OF GROWTH

Relative Urban and Suburban Growth Rates in the Largest 50 Metropolitan Areas, 2015 - 2017

Urban growth strongest in

gateway markets

Rust belt metros

decliningMost growing metros are experiencing faster

suburban growth than urban growth


One-third of metro households are cost burdened as housing costs outpace income growth

Source: Harvard JCHS

HOUSING ECONOMICS

Share of HH with Cost Burdens (%)

Under 20%

20%-29%

30%-39%

40% and over (up to 47%)

Coastal areas have the most extreme cost burdens and face

increasing regulatory pressure to improve affordability


Land values steadily increasing since financial crisis, land prices in gateway markets especially high

Source: Lincoln Land Institute

HOUSING ECONOMICS

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030

Land

Val

ue o

f an

Ave

rage

Hom

e

Top 50 MSAs Top 10 MSAs

Average Land Values of Top 50 and Top 10 Largest MSAs by Population, 2000 – 2030

Land Value calculated as Home Value less Structure Costs (of construction and materials), the latter being stickier than home prices.


Growing levels of indebtedness may constrain ability to buy

Source: Federal Reserve Bank of New York Consumer Credit Panel

HOUSING ECONOMICS

U.S. Non-Mortgage Household Debt (in trillions), 2003-2018

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2003 2005 2007 2009 2011 2013 2015 2017

HE Revolving Auto Loan Credit Card Student Loan Other

Total student loan debt

outstanding has grown by

6X in the past 15 years


The sector continues to innovate with new product and approaches to meeting customer demand

INNOVATIONS

Annadel Apartments – Katerra Avilla Homes – NexMetro Communities

Institutionalized Single-family Rental Co-living


Takeaways

1. Outlook: no recession, low interest rates, slow growth, little inflation for 2019 (+?)2. Demographic tailwinds (renters, stages/ages, im/migration, seniors)3. Still about the “smile” states4. Too much high end?5. Affordability constraint

» Down payment and mortgage qualification» Rising construction costs and land values» Gentrification is primary source of affordable housing in established metros

6. Location: suburbs in growth metros, jobs, affordability & taxes» Winners – New Economy (STEM, Med-Ed) and affordable diversified metros in CA, SE,

SW (watch Oklahoma), Mountain Region (ID, UT, CO, NV & AZ)» Losers – Inland industrial and high cost large cities (Mid-Atlantic and NE, Midwest, West)

7. Innovations to keep up with:» Tech Revolution: PropTech, predictive analytics, 5G, robotics» Construction techniques (faster, better, cheaper)» Innovative affordable housing solutions (density, size, construction technique)» SFR is here to stay (10%-20% of MPC, or more)» Vertical integration (developer/builder/operator, customer for life model)

LOOKING FORWARD


2019 Playbook – Top 10 List

1. Watch the balance sheet

2. Chase efficiency

3. Figure out how to deliver lower priced product

4. Renters matter (over 20% of the market)

5. Invest in technology (lead or follow, but don’t fall behind)

6. Invest in talent

7. Invest in your customers

8. Invest in innovation

9. Learn to integrate

10.Segmentation has a whole new meaning

LOOKING FORWARD

AUSTIN LA ORLANDO DC

221 W 6th St

Suite 2030

Austin, TX 78701

11601 Wilshire Blvd

Suite 1650

Los Angeles, CA 90025

964 Lake Baldwin Ln

Suite 100

Orlando, FL 32814

7200 Wisconsin Ave

Suite 1110

Bethesda, MD 20814

Gadi Kaufmann

Managing Director & CEO

P: (310) 203-3033

E: [email protected]

W: RCLCO.COM

trends in housing - rclco.com · large metros capture an increasing share of job and wealth growth...

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