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December 12, 2016

Historically speaking, housing for American citizens has represented a safe investment and a key element for accumulating wealth. Yet for the 11-year period ranging from 1996 to 2006, the change in same-home prices, adjusted for inflation, rose an unprecedented 70.7 percent. The housing market crash and resulting Global Financial Crisis (GFC) knocked values down 30.6 percent from the peak values of 2006. Following six years of depreciation, home prices have steadily climbed since 2012, increasing 20.1 percent.

In the current economic climate, the strengthening of home price values belies the delicate nature of overall housing activity. In their release of November’s minutes of the Federal Open Market Committee, the Federal Reserve noted that housing market activity was weak in the third quarter, as real residential investment spending decreased, due in part to a decline in total housing starts. The Committee additionally referenced the mixed construction data, as heightened single-family permits and starts have not overcome the organic declines in the multifamily space. This state of construction has persisted—essentially flat since late 2015.

Housing deliveries haven’t kept up with labor market gains

These macro-level observations are further supported by the widening disparity between consistent employment growth, permitting and homebuilding—in single family housing and even multifamily. As a benchmark, since millennials began to enter the workforce in 2004, markets nationally on average have been permitting 1 multifamily unit for every 4 non-farm jobs added. With ratios such as 1:12 in San Francisco-Oakland, 1:10 in Chicago and 1:8 in Atlanta, this demonstrates an underserved population with regard to rental housing, despite multifamily development levels seen in the current expansion. In fact, 70.0 percent of markets are underperforming expected multifamily housing delivery levels when considering recent job gains.

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Home price value gains are impressive

The even greater gap in single family homebuilding paired with home price gains over the past four years are representative of a barrier to entry for first-time homebuyers, as a confluence of factors make sufficient down payments out of reach: Systemic issues ranging from student debt to the lack of accumulated wealth in a low interest rate environment, to generational lifestyle shifts that have largely eschewed the commitment necessary for purchasing a home in favor of labor flexibility and adaptability. The gains in housing values have not spread evenly throughout the country, as seven metros in the Western region have seen home price value gains in excess of 40.0 percent since 2012. Conversely, the mature, established metros of the Northeast have seen lagging home price value gains, as Chicago, Washington, DC and New York have seen values appreciate between 11.4 and 18.1 percent.

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Single-family housing starts continue to lag

In spite of these impressive gains, single-family housing starts are occurring at less than half the rate of the peak of the previous cycle in 2006. One key factor of this lag has been the rising cost of housing, driven in part by the scarcity of land, municipal regulations limiting high-density development, growing construction material and labor costs, the lack of skilled construction labor as well as increased demand for lumber across the nation. The constraints on housing are only exasperated in a strong labor market environment. Multifamily has continued to benefit, and thus the construction of multifamily housing has recovered from last decade’s crash, supported by consistent, strong demand. The aforementioned factors support the U.S.’s current structural shift towards renting.

Housing forecast: What to expect in 2017?

The Bureau of Labor Statistics’ Employment Situation report for November added 178,000 private sector jobs on the month, resulting in a 4.6 percent unemployment rate. November’s job growth represents a record-setting 74th consecutive month of gains, emphasizing a steady domestic economy. This report adds further evidence to the Fed’s decision regarding an interest rate increase at year’s end. As the prospect of higher interest rates trickles into the underwriting of higher mortgage rates, the likelihood of a sudden mass exodus of tenants from the multifamily space appears slim, even as the millennial cohort moves toward life milestones such as marriage and raising children.

JLL Research

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