Dr. Rob Dietz: Making Sense of a Volatile Housing Market
Navigating the ups and downs of the real estate market has always been challenging, but 2022 has presented would-be buyers and sellers alike with a singular set of complications.
The COVID pandemic and the rise of remote work have changed our calculations for deciding where we want —and can afford— to live. Significant inflation —and rising interest rates— have further muddied the equation.
In today’s episode, Eric speaks to Dr. Rob Dietz, Chief Economist and Senior Vice President for Economics and Housing Policy for the National Association of Home Builders, to help untangle this knot of real estate confusion and make sense of a chaotic market.
Listen in as Rob brings his expertise to bear on emerging trends in the market, his tips for both buyers and sellers, and what to expect in the months and years to come.
ABOUT DR. ROBERT DIETZ: Dr. Robert Dietz is Chief Economist and Senior Vice President for Economics and Housing Policy for the National Association of Home Builders (NAHB). His work focuses on housing market analysis, economic forecasting and industry surveys, and housing policy research.
Prior to joining NAHB in 2005, Dietz worked as an economist for the Congressional Joint Committee on Taxation, as the committee’s real estate expert. He is a native of Dayton, Ohio, and earned a Ph.D. in Economics from Ohio State University.
Eric Jaffe: We make decisions every day. While some of them are small, others can have a huge impact on our own lives and those around us. But how often do we stop to think about how we make decisions? Welcome to Deciding Factors, a podcast from GLG. I’m your host, Eric Jaffe. In each episode, I’ll talk to world-class experts and leaders in government, medicine, business, and beyond who can share their firsthand experiences and explain how they make some of their biggest decisions. We’ll give you fresh insights to help you tackle the tough decisions in your professional life.
Eric Jaffe: While navigating the ups and downs of the real estate market has always been challenging, 2022 has ushered in a singular set of complications for would-be buyers and sellers alike. The COVID pandemic and the rise of remote work have changed how people decide where they want and can afford to live. Significant inflation and rising interest rates have further muddied the equation. Throw a deficit of housing stock, a rising proportion of young adults living with their parents, and a surge of investors buying properties into the mix, and you’d be forgiven for wanting to give it all up and move to a yurt in Mongolia.
Eric Jaffe: Fortunately, our guest today is well-equipped to help us untangle this knot of real estate confusion and make sense of a chaotic market. Dr. Rob Dietz is chief economist and senior vice president for economics and housing policy for the National Association of Home Builders, where he focuses on housing market analysis, economic forecasting, and housing policy research. Listen in as Rob brings his expertise to bear on emerging trends in the market, his tips for both buyers and sellers, and what to expect in the months and years to come.
Eric Jaffe: Rob, great to have you with us on Deciding Factors this morning.
Dr. Rob Dietz: Yeah, it’s good to be here this morning.
Eric Jaffe: Maybe we could start by just doing an overview on the housing market. Inventories are rising, sales are slowing, but we also have a national deficit of housing. Is that deficit real? If we do have a deficit, how did that happen over the last decade?
Dr. Rob Dietz: I think the important thing with the housing market right now is trying to distinguish between short-run dynamics, which are clearly related to the tightening cycle that the Federal Reserve sees and then the long-term structural deficit. In the short run, the challenges are, as you identified, they’re connected to inflation and where we are in the macro environment. Obviously, the inflation data over the last few months has come in higher than many have hoped. I’m not sure if we can say forecasted, but certainly hoped. The Federal Reserve is going to have to go higher in terms of that tightening cycle. They’re also reducing the balance sheet, which is having a larger impact on the 30-year fixed-rate mortgage.
Dr. Rob Dietz: That jump in mortgage interest rates, particularly at the start of the year, I mean, we entered 2022 with effectively a 3%, 30-year fixed-rate mortgage. It’s now fairly close to 6%. A doubling of rates has really reduced buyer traffic and priced out a lot of buyers, particularly first-time buyers in the marketplace. The result is rising inventories, but that’s all occurring within this longer-run story of a structural deficit, a lack of housing given today’s demographics. In other words, the size of the population, the number of households. This has been a challenge, particularly in the single-family market for the last seven or eight years. It’s a natural consequence of the fact that if you go back to the Great Recession, we were underbuilding housing roughly from 2011 to 2019.
Dr. Rob Dietz: Now there is some debate within the housing community, the economics community, on how big that deficit is. There are estimates as high as 5 million. The Freddie Mac economics team thinks we’re probably short about 4 million homes. I think the deficit’s a little closer to about a million homes. It’s a deficit. It’s there. It’s measurable. I think it’s significant. It’s maybe not as high as many people expect. Again, the reasons for it is a lack of home building over the last roughly decade. We’ve attributed that lack of home building due to supply-side issues within the home construction sector.
Dr. Rob Dietz: I’ve called them the five Ls. It’s a lack of labor, lots, lending to builders and developers, issues surrounding lumber and building materials, and then of course, legal and regulatory costs that get built into the system. All of that has resulted in this rather strange environment when you combine in the short run and the long run that buyers are being priced out of the market, demand is retreating, but you still have price growth, at least on a national basis. Prices are falling in a lot of local markets, but price growth due to the fact that you have this lack of attainable supply.
Dr. Rob Dietz: It’s a tough environment for the housing market and it’s a tough environment for the Federal Reserve, which of course wants to bring down things like the cost of rent. It’s difficult to do that when you have crude policy tools that the Fed has, which can really only address the demand side of the equation.
Eric Jaffe: If we do see interest rates go up, which of course at this point everyone expects will be the case, how much of that 1 million home deficit do you expect to be consumed by that or is that not how it works?
Dr. Rob Dietz: I think what we’re going to see is actually just a temporary retreat of some of that demographic demand. An obvious question is, well, what happens to those people, where do they go? Well, they substitute out of the for sale housing market and they move into the rental housing market. That’s causing rent growth to go up. But from a demographic perspective, you get more doubling and tripling up of roommates. Then a number we’ve been watching, we’ve been watching this one for a couple of decades now, is you see an increase in the share of young adults who are living with their parents. That share has roughly doubled from the year 2000 to today.
Dr. Rob Dietz: We’ve gone from 1 in 10, 25 to 34 year olds living with their parents to today it’s more than 1 in 5. I think that share is going to go up because of those higher interest rates. That rising inventory is more the short-run dynamic of what’s attainable housing due to a more than decade low of housing affordability versus an actual growth in the housing stock, which comes about through home construction, which is less of a market-based measure and more of a demographic-based measure of how much housing stock do we have available to house today’s population.
Eric Jaffe: Let’s talk about home prices. How much do you expect home prices to drop and at what rate given the perspective rise in interest rates?
Dr. Rob Dietz: I think at this part, most analysts, most economists that look at the housing market are now expecting some limited price declines. Six months ago, nine months ago, I think it was really the minority view that we would see any home price decline, in part because home prices had been going up at 15% to 20% year-over-year growth rates. The feeling was, “Okay, well, prices will slow down. We still have this structural deficit and the jump in interest rates will cause prices to just level off.” That’s looking more like the optimistic case at this point. In fact, if you look at data in a lot of local markets, including what builders tell us at NAHB, you’re already seeing price cuts. In fact, about a fifth of builders right now are using price cuts as a form of incentive to maintain sales.
Dr. Rob Dietz: If you look at the local markets where prices are falling, they’re the previously super-hot markets in the post-COVID environment. Markets like Boise, Austin, hot markets where a lot of population was moving into those markets where you had a lot of investor activity. Now, this isn’t flipping. This is investors really looking to get exposure, particularly into the single-family rental market, but that is slowing down and it is resulting in net price reductions.
Dr. Rob Dietz: In our forecast, when we’re looking at what we think home prices are going to do on a nationwide basis, we have a limited, small, single-digit price decline that we think is going to occur in the second half of 2022, ongoing price weakness during the first half of 2023. Then we think a leveling off process as the Fed releases the brakes and we move forward in terms of the housing market. From peak, price declines of 5% on a nationwide basis are not unreasonable. Then in super-hot markets where prices have gone up 40% or 50% from the start of COVID, it’s not unrealistic in those markets to think you could see a 15% price decline.
Dr. Rob Dietz: Now, it’s really important when we’re talking about price declines to distinguish today’s environment for the housing market compared to the 2007, 2009 period. During the Great Recession, you had a lot of loose underwriting. There wasn’t a housing deficit. There was a housing glut due to really high levels of home building. We’ve had low levels of home building running in into this particular downturn. The result was that when those price declines occurred in the marketplace, you had waves of foreclosure that then fed into further price declines.
Dr. Rob Dietz: This environment is really more about a reset. It’s attempting, given the change in mortgage interest rates, what is the appropriate level of home prices for the market to clear? In many cases, those markets are overvalued and frothy. We’re going through this reset process, as chair Powell indicated, the tightening and monetary policy is going to cause pain. We’re going to see some of that pain in the housing market.
Eric Jaffe: The exodus from cities to suburbs is well documented during COVID, people going for more space and certainly more green space. As we come to a period where COVID has begun to ease, people are returning to their offices, how much of that trend is reversing nationwide and five years from now what do you think it will look like?
Dr. Rob Dietz: There have been some permanent level shifts because hybrid work models, that we think probably involves about a third of the workforce working at home a day or two days a week, does mean that for a home buyer who’s looking to drive until they qualify in terms of getting more bang for their buck in terms of housing demand, they’ve got a broader geographic area from which to search. They’re thinking about the weekly commute time and gas cost rather than say the daily commute because they’re not going in every day.
Dr. Rob Dietz: Now, that’s not everyone. It’s again about a third of the workforce, but it has left a mark. You’ve seen some shifting, an equalization taking place in terms of the growth rates and then interest rates go up. What was interesting, we had been looking at the data and saying, “Okay, well, it looks like we’re kind of back to norms,” back in 2021, the shift out had ended and those higher interest rates now look like, at least in terms of construction permit data, are affecting the higher density, higher-cost markets more severely. Now you’re getting a separation again after an equalization.
Dr. Rob Dietz: I think that is going to play out because if you look at the markets that are seeing the largest declines, at least in the short run in terms of home building activity, they’re the markets with the highest price-to-income ratios, the places that have the highest levels of construction costs. Those markets tend to be the ones that have the highest amount of regulatory burden cost in terms of developing land and building homes, higher impact fees, just more rules and it takes longer. It’s markets like the expensive ones in California, for example, that seem to be retreating the most. In addition to some of the hot markets in the mountain states where things, at least in terms of pricing, got out ahead of local income.
Dr. Rob Dietz: I think if you’re thinking about the kinds of housing that is being built and where it’s being built, it looks like we’ve got this permanent level shift out to the suburbs, but that’s not to say that things like townhouse construction that occurs in large density inner suburbs doesn’t have some growth ahead of it because that’s really the only way that we’re going to be able to address that housing deficit.
Eric Jaffe: I thought we could talk a little bit about how buyers and sellers might approach their decisions and how you would think about it. Maybe we can start with buyers. What are the most important factors buyers do consider and should consider when they’re purchasing a home in your view?
Dr. Rob Dietz: I think it’s home size and demographic need. It’s based off of family size and how much of a home you can afford. Interest rates have got to be an important part of that calculation given the change that’s taken place. I mean, the 2% to 3%, 30-year fixed-rate mortgages that we saw in the market more than a year ago, that was really ahistoric. That was historic low in terms of financing costs. I know some particularly younger buyers are looking at 5% to 6% rates and saying, “That seems pretty high.” Well, compared to prior decades, it’s still fairly low, but I understand prices are higher as well.
Dr. Rob Dietz: The affordability calculation has changed. You got to do your homework. What I typically are recommending to home buyers is patience and strategy. Strategy means expanding that geographic area from which you’re searching for homes because the existing home market remains tight in terms of inventory. And patience, when you’re buying a home, the typical buyer is going to hold that home for 7 to 10 years, and some buyers are going to hold it for 30 or 40. Think about the kinds of demographic changes your household’s going to go through.
Eric Jaffe: Maybe you could talk a bit about a trend that’s been getting more and more attention, the private-equity-backed owners. They’re actually now the dominant form of apartment building ownership in the US, according to a report from ProPublica. How has that trend affected home buying and the housing industry overall?
Dr. Rob Dietz: The investor participation, particularly in the single-family rental market, I think is something that’s new that’s seen a lot of change, at least in terms of its scope and scale in this housing cycle. We’ve always had a large, single-family rental stock in the country. Of course, investors have been always active in the multi-family space, but it’s really on the single-family side where we see the change.
Dr. Rob Dietz: It used to be about 14 out of 15 single-family homes in the rental market were owned by mom and pop investors. That’s beginning to decline. With the rise of capital looking to get into single-family rental, you’re also seeing the rise of what I guess we can call horizontal multi-family, dedicated communities that operate effectively a lot like an apartment building, but as a single-family rental community. That’s particularly having an impact in the home-building market.
Dr. Rob Dietz: Historically about 3% of single-family construction was built as rental housing. A lot of that was really senior-type housing development. Today, we estimate that maybe somewhere around 11% or 12% of single-family home building is ultimately going to end up in the rental stock. About half of that is being built by builders, and then held by that builder to operate as rental property in the same way that a multi-family merchant developer would operate. Then the other half of that 11% to 12% is being sold to an investor who attends to own and operate that single-family home as a rental property.
Dr. Rob Dietz: The reason for the take off of that, the expectation of higher mortgage interest rates, which of course have been realized here at the start of 2022, that’s priced out potential home buyers, particularly first-time buyers who would require high loan-to-value ratios and thus have shifted over into the rental market. I think this is going to become a political issue as well because the expectation is that with these higher interest rates due to the actions of the Federal Reserve, we are eventually going to see in the quarters ahead declines in the home-ownership rate. That is one key area from the housing market that can quickly become an election issue. If you see declines in the home-ownership rate, there’s likely going to be some discussion of who is the villain in this process.
Dr. Rob Dietz: Well, from an economics point of view, the challenge is really just that we have a housing deficit and people are being priced out of the marketplace. But I think unfortunately, what we’re going to see is some demonization of investors who purchase single-family homes and thus “crowd out” people’s ability to become homeowners. When in fact, that’s just a way of getting some investment in the housing community. Given the fact that we’ve got a housing deficit, single-family built for rent construction is a way that we can add housing supply. It’s really much needed.
Eric Jaffe: Interesting. Let’s move on to sellers. What are the most important factors sellers consider when they’re making the decision to sell, how to price it, how to structure that sale, and then ultimately who they end up choosing if they have multiple bids?
Dr. Rob Dietz: Interest rates really are the primary factor. I think sellers, as a community, got used to this super-hot market, particularly at the end of 2021 due to historically low interest rates and this surge in interest in owning a home, particularly living in a single family home as people worked from home more due to the COVID crisis.
Dr. Rob Dietz: The big thing I think sellers are going to have to wrap their minds around right now is this reset process. Prices are going down in some markets. Those higher interest rates does mean a smaller pool of potential buyers. We see this clearly in our surveys of builders that buyer traffic is as low as it’s been since 2014 and going down. What that means is that there’s more price incentive use in the market right now. This is from a builder perspective. A common incentive is an interest rate buydown to get the more mortgage interest rate that would be taken on by the buyer lower than market forces would suggest.
Dr. Rob Dietz: I think sellers need to be prepared with this smaller traffic environment. If you’re an existing homeowner, that may mean remodeling a home, making improvements and investments into it to make it attractive to a home buyer. Inventory remains tight, but this is certainly moved in the direction of more of a buyer’s market than what we saw a year ago.
Eric Jaffe: What are some of the biggest mistakes that you think you see sellers make?
Dr. Rob Dietz: I think from a seller perspective, the biggest mistake that you often see in looking at the data and talking to folks is just the inability to recognize what now is the market price for a home. An emotional asset, but an asset nonetheless, that’s really responding to supply and demand.
Eric Jaffe: Let’s talk about a common decision that sellers face, selling versus renovating. That could be renovating and deciding to stay, or it could be renovating so that you get a higher price or make your home more attractive.
Dr. Rob Dietz: This is a really important calculation right now in the marketplaces. A lot of existing homeowners are going to be reluctant to move because they have a mortgage and an interest rate that’s much below current market rates. If you’ve got a mortgage and it’s two-point something or even three-point something, and then you look at if I were to go buy a new home and move, I would go have to go buy a home and get a mortgage that’s closer to 6% so that the impact of that in terms of the economics is a lock-in effect. People reduce their willingness to move. You just get this decline in both home buyers, in other words, buyers looking in the marketplace, but also you get a decline in the amount of resale inventory hitting the market because people are more reluctant to give up that mortgage.
Dr. Rob Dietz: If they’re not going to move, then they reinvest in their home. This is actually a bullish indicator for the remodeling sector. The remodeling market remains solid and strong. Yes, there’s been some declines in terms of when existing home sales activity tends to fall, remodeling does, but there are these other bullish indicators, including the fact that people are remaining in their homes longer, and we also have this big wave of Baby Boomers who are going to age in place. That age in place home improvement activity does offer a particularly important business opportunity for the remodeling sector.
Eric Jaffe: As a lay person looking at home building, it’s not obvious that technology has played as dramatic a role in affecting that industry as so many other aspects of our modern life. Is that accurate, and if so, are you surprised about that?
Dr. Rob Dietz: It really is an issue in the home building sector. One of the challenges that residential construction has faced is an ongoing skilled labor shortage. The reason for that is connected to variety of demographic issues, but one of the factors is the fact that productivity growth in the home building sector has really lagged the overall economy. The overall economy has actually seen four times the growth in productivity.
Dr. Rob Dietz: At conferences and discussions of builders, one of the solutions you hear that lack of productivity is applying technology and finding new ways to build homes. An often discussed one is more modular and penalized construction. Well, modular and penalized construction needs building the whole home, or at least the frames of the home, in a factory, capturing the economies of scale, and then shipping those assembled materials out to the eventual home site. In theory, that offers a productivity gain potentially reducing costs and allowing us to build more housing.
Dr. Rob Dietz: The problem is you don’t actually see it in the data. It’s often one that’s more discussed than actually applied. In fact, in terms of the overall market, only about 3% of single-family home construction is modular or panelized construction. Not only is that share a lot lower than I think people would expect given discussions about 3D printing and other ways of building a home, but that 3% share is even lower than the market share of that same technology back in the late ’90s. In the late ’90s, it was 7% to 8% home building. We’ve actually seen over the last couple of decades a decline in this kind of activity.
Dr. Rob Dietz: I do think there’s an opportunity for growth. I do think we’re going to see more of these kinds of building systems approaches to get some productivity gains in construction. It’s going to take some time. Then, of course, the other place that we see technology being deployed is the sales and marketing process. That there’s been a lot of change, a lot of investment in, but the actual construction process continues to be, I think, the low-hanging fruit in terms of investment opportunities and business opportunities going forward. I do think that share of modular and panelized construction is going to rise over the next 10 to 15 years.
Eric Jaffe: Then maybe finally you mentioned the marketing and sales and certainly the home buying side of things, Zillow, Airbnb, et cetera. There’s been a huge change from technology. Do you expect that to continue? How do you expect that to continue to affect the home buying side of things? Again, 5 or 10 years from now, what do you think things will look like?
Dr. Rob Dietz: I think we will continue to see that on the sales side, the demand side of the industry, those kinds of technological features that basically improve the information available to both buyers and sellers and therefore improve the matching process, reduce the amount of housing that’s sitting vacant because it’s on the market. All that is good. It improves the overall efficiency of the housing market. I do think that is going to continue. You combine that with the growth in the single-family rental part of the market, and these are some ways at the margin that we can address some of those housing affordability and housing shortage issues.
Dr. Rob Dietz: But the real challenge here in the housing market, particularly if you’re looking beyond the monetary policy tightening cycle that we’re in right now, is addressing that large housing deficit. That really is going to require just simply more home building. While I do think change is coming to the residential construction sector, history teaches us that that change will be slow. This is going to be a slow, gradual process that will ultimately yield more construction, more housing stock, but it really is going to take some time.
Eric Jaffe: Fantastic. Dr. Rob Dietz, thank you so much for coming on Deciding Factors, a really enlightening conversation. Thank you again.
Dr. Rob Dietz: Thank you.
Eric Jaffe: That was Dr. Rob Dietz, chief economist and senior vice president for economics and housing policy for the National Association of Home Builders. I was really struck by the sheer complexity and number of factors that Rob highlighted. Many of them it seems are operating independently of one another and steering the real estate market in wildly different directions. In other words, if you want to buy, sell or invest in the real estate market and you want to make money doing it, you better do your homework.
Eric Jaffe: We hope you’ll join us next time for a brand new episode of Deciding Factors featuring another one of GLG’s network members. Every day, GLG facilitates conversations with experts across nearly every industry and geography helping our clients with insight that leads to true clarity. Feel free to leave us a review on Apple Podcasts. We’d love to hear from you or email us at Decidingfactors@glgroup.com if you have feedback or ideas for future show topics.
Eric Jaffe: For Deciding Factors and GLG, I’m Eric Jaffe. Thanks for listening.
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