National Housing Market Outlook

Housing Booming, Busting and Muddling Along

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John Burns

March 25, 2014

Housing is local again! Our consultants and clients see vastly different housing markets all across the country. I categorize them into three groups (booming, busting, and muddling) in this article and provide anecdotes from our team members—but it is really more complicated than that.

Booming Markets

I find three primary reasons that certain housing markets are booming:

  1. Tech boom. Prices are rising rapidly in the best locations in the Bay Area and Seattle. I believe the best Bay Area locations, which extend all the way to the East Bay, are now officially overpriced because the wave of tech millionaires will not continue forever. Our Northern California leader Dean Wehrli recently calculated that one city in the Bay Area is usually 20% more expensive than a more outlying city is now 50% more expensive!

  2. Pro-growth environment and oil boom. Texas’s pro-growth attitude which is best exemplified by their governor who has been flying all over the country to recruit companies to Texas, has succeeded in adding 700 new jobs per day for the last two years, and those new employees are buying homes, particularly in Houston. Our Dallas consulting leader Paige Shipp notes that the oil industry boom helps, but health care, financial services, transportation, and other sectors have also contributed to the growth.

  3. 45+ buyer markets. The oldest Baby Boomer turns 68 this year, and the youngest turns 50. They are buying homes in droves as their employment situation, home values, and stock portfolios have almost fully recovered from the Great Recession. Our Florida leader Lesley Deutch was recently in Naples, where prices are rising rapidly thanks to strong sales. We are seeing strong sales in this same demographic throughout the country, however.

Busting Markets

The press loves negative news, so expect more national attention devoted to the following three categories of markets:

  1. Hockey stick markets. Phoenix, Las Vegas, inland California from Sacramento to Riverside, and possibly Tampa Florida overcorrected during the downturn and came back too far and too fast thanks to tremendous investor activity coupled with Federal Reserve driven mortgage rate stimulus. Rates rose, investors pulled back, and now entry-level buyers suffer from sticker shock because the monthly payment has risen 30%+ in one year. The new home market struggles even more, since land prices have rebounded to all-time highs in key areas like Phoenix, and home builders have priced the homes to achieve a profit they are unlikely to see. Ken Perlman from our team notes substantial incentives and price discounts have emerged in the last two months.

  2. Lower FHA limits are a double whammy to expensive markets. The same markets mentioned above, as well as San Diego, Charlotte, Los Angeles, Orange County, CA, Orlando, and Phoenix also got hit by lower FHA limits on January 1. FHA will no longer insure a significant percentage of buyers in those markets, which has had the greatest impact on “boomerang” buyers, who can get a mortgage through FHA after a three-year wait period but cannot get a comparable mortgage otherwise. Consulting leader Pete Reeb calculated that a particular neighborhood was likely to lose 16% of demand thanks to FHA changes.

  3. Oversupplied. A few markets have also seen a surge in supply, such as Raleigh, where our Southeast leader David Kalosis reports that one of our clients counted 13 new builders in the last 3 years. We love Nashville, but so do many others, so we expect a supply surge there as well.

Muddling Along Markets

While national headlines have been somewhat negative since sales are not as strong as last year’s Fed- and investor-induced spring, January and February sales have improved at a slightly better than normal rates. Here are a few other signs we are seeing:

  1. Late to the economic recovery and not attractive to investors. The Midwest and Northeast (except Manhattan) still hasn’t benefited much from the low mortgage rates, so we are optimistic that those housing markets will perform very well this year once everyone thaws out from the brutal winter weather. Our Chicago consultant Lance Ramella reports strong sales last weekend.

  2. Overcorrected down and still correcting up. Our President Don Walker, who has been helping many of the institutional investor groups allocate capital, reports that the Carolinas, Georgia (recently slowed by weather), and parts of Florida still provide great returns to investors, who are driving prices up. The economies also continue to perform well.

  3. Overcoming sticker shock. Southern California coastal buyers suffer from sticker shock after two years of rapidly rising prices. But they are gradually realizing that the mortgage payment in relation to income is near historical averages, so they might as well buy now before they get priced out of the market. Jody Kahn as been interviewing 50 builders a week to keep a pulse on the spring selling season.

  4. Slowing a bit due to a rise in supply. New home construction increased 60%+ over the last year in Orange County, CA and Atlanta, which has created a more competitive housing market. More than enough jobs are being created in both places, however, to satisfy the demand. Our Consumer Research leader Mollie Carmichael has been busy helping home builders target the fastest-growing consumer segments who cannot find what they want in the resale market.

  5. Recovering just fine. Washington, DC and Denver did not boom or bust as much as other markets and are experiencing a normal seasonal pickup. Our DC leader Dan Fulton reports that local municipalities have approved more than 100,000 new high-density housing units around transit nodes, which is where we expect the bulk of growth to go.

In summary, the national housing market continues to improve, but local market conditions vary dramatically. Whatever your interests, be sure to do your homework.

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About The Author

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John Burns
Chief Executive Officer
As CEO, John grows, leads, and supports a team of passionate, articulate, likable, and smart experts. Together, we solve today so our clients can navigate to tomorrow.

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