Rising Risks for the Housing Outlook

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1 Rising Risks for the Housing Outlook Master Builders Association of Pierce County October 17, 2018 Robert Dietz, Ph.D. NAHB Chief Economist

2 Population Growth Pierce County population growing faster than national and statewide rates Thousands U.S. 0.8% 0.7% 0.8% 0.7% 0.8% 0.8% 0.7% 0.7% Washington 1.1% 1.2% 1.1% 1.1% 1.2% 1.5% 1.8% 1.7% Pierce County -0.2% 0.9% 1.0% 1.0% 1.2% 1.5% 2.2% 2.0% 6,741 6,819 6,891 6,963 7,047 7,153 7,281 Thousands 7,406 8,000 7,500 7,000 6, , ,500 Source: U.S. Census Bureau (BOC). Washington Pierce

3 Payroll Employment Tacoma MSA above pre-recession peak 3,400 3,200 3,000 Thousands, SA Washington 3,007 Thousands, SA 114% 116% 2,600 2,400 2,200 2,800 2,600 1,788 94% 2,000 1,800 2,400 93% 1,600 2,200 Seattle-Tacoma-Bellevue, WA 1,400 2, ,200 Source: U.S. Bureau of Labor Statistics (BLS).

4 Existing House Price Index Tacoma MSA above pre-recession peak 2000Q1 = 100, SA Relative to Pre-recession Peak US Tacoma Recession-era Low 81% 72% Current 112% 133% Seattle-Tacoma-Bellevue, WA United States Source: U.S. Federal Housing Finance Agency (FHFA). 0

5 Washington Real GDP Growth 15% Q/Q Percent Change (annualized), SAAR 10% 5% 5% 6% 3% 4% 0% -5% -10% -15% Source: U.S. Bureau of Economic Analysis (BEA).

6 GDP Growth Stronger growth expected post-tax reform 10% 8% 6% Q/Q Percent Change, SAAR Annual Growth LT avg ( 58-07) 3.4% % % 2018 f 2.9% 2019 f 2.6% 2020 f 1.8% 4% 2% 0% -2% -4% -6% -8% -10% Source: U.S. Bureau of Economic Analysis (BEA) and NAHB forecast.

7 Dec 1854 Dec 1858 Jun 1861 Dec 1867 Dec 1870 Mar 1879 May 1885 Apr 1888 May 1891 Jun 1894 Jun 1897 Dec 1900 Aug 1904 Jun 1908 Jan 1912 Dec 1914 Mar 1919 Jul 1921 Jul 1924 Nov 1927 Mar 1933 Jun 1938 Oct 1945 Oct 1949 May 1954 Apr 1958 Feb 1961 Nov 1970 Mar 1975 Jul 1980 Nov 1982 Mar 1991 Nov Expansion is Aging Current expansion is 113 months old second longest Trough to Peak, Months Source: National Bureau of Economic Research (NBER).

8 Tight Labor Market How low can unemployment go? Percent, SA 5.0% Percent, SA 12% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% Unemployment Rate Job Openings Rate % 10% 9% 8% 7% 6% 5% 4% 3% 2% Source: U.S. Bureau of Labor Statistics (BLS) and NAHB forecast.

9 85% 84% Labor Force Participation Rate Improving labor force participation key to future growth Percentage, SA 68% 67% 83% Overall 66% 65% 82% 81% 80% 79% Age % 63% 62% 61% 60% 78% % Source: U.S. Bureau of Labor Statistics (BLS).

10 Cumulative Change in Employment by Age Group Mind the Gen-X gap 20 Millions of Employees, SA and Older 5 0 Under Source: U.S. Bureau of Labor Statistics (BLS).

11 Consumer and Core Inflation Inflation pressures building Percent, SAAR CPI Core PCE Source: U.S. Bureau of Labor Statistics (BLS) and NAHB forecast.

12 Target Federal Funds Rate Fed will continue to raise rates 9% 9% 8% 8% 7% 10-year Treasury 6.5% 7% 6% 6.0% 5.3% 6% 5% 4.8% 5% 4% 3.4% 3.5% 4% 3% 3.0% 3.0% 2.6% 3% 2% 1.8% 2% 1% Federal Funds Rate 1% 0% Source: Federal Reserve data and NAHB forecast. 0%

13 30-Year Fixed Rate Mortgage and 10-Year Treasury Rates will rise due to Fed policy and tight labor markets 12% 12% 10% 30-Year Fixed Rate Mortgage October 31, % 8% 8% 6% 6% 4% 10-Year Treasury 4% 2% Mortgage Risk Premium (Difference) 2% 0% % Source: Federal Reserve and Freddie Mac data and NAHB forecast.

14 Housing Demand and Affordability

15 Consumer Confidence Continues Positive Run Index 1985=100, SA Source: The Conference Board

16 Headship rates increase from 15% to 45% Rising Population Entering Housing Demand Years: Millions Avg=4.3 v Silent Generation: Born Greatest Generation: Born Before Gen Z: Born After 1997 Millennials: Born Gen X: Born Baby Boomers: Born

17 Household Formation Demand for home ownership strengthening 2,500 Y/Y Change in Household Count, Thousands, NSA Owner-Occupied 2,000 1,500 1, ,000 2,500 2,000 1,500 1, ,000 Renter-Occupied Source: U.S. Census Bureau (BOC): Housing Vacancies & Homeownership.

18 Share of Young Adults Living with Parents Almost doubled 60% 58% 56% 54% 52% Ages 18 to 24 25% 23% 21% 19% 50% 48% 46% 44% 42% 40% Ages 25 to Source: US Census 1990, 2000, PUMS, ACS, PUMS, NAHB Estimates. 17% 15% 13% 11% 9%

19 Homeownership Rate 71% Percentage, Quarterly, SA % 69% 68% 67% 66% 69.4% % 64% 63% 62% 61% 64.4% Source: U.S. Census Bureau (BOC): Housing Vacancies & Homeownership.

20 S&P/Case-Shiller National US Home Price Index Prices growing faster than income Percent Growth, SAAR Source: S&P Dow Jones Indices LLC; CoreLogic, Inc. and NAHB forecast.

21 Housing Affordability NAHB/Wells Fargo HOI National Tacoma-Lakewood, WA Source: NAHB/Wells Fargo Housing Opportunity Index.

22 Existing Single-Family Home Sales 7 Million Units, SAAR Source: National Association of Realtors (NAR) and NAHB forecast.

23 Supply-Side Factors

24 Building Materials Lumber Prices Since January 2017, lumber prices increased 9%; 63% at peak $600 $550 $ per thousand board feet 582 $500 $450 $ $350 $300 $ Source: NAHB Analysis; Random Lengths Composite Index.

25 Labor Elevated count of unfilled construction jobs 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% Job openings rate - Construction 12-month moving average % Source: U.S. Bureau of Labor Statistics (BLS). -

26 Construction Sector Productivity Lagging overall economy Index, 1993 = Construction Worker Productivity Overall Worker Productivity Source: U.S. Bureau of Labor Statistics (BLS).

27 Construction Outlook

28 Single-Family Starts Modest growth ahead 2,000 Thousands of units, SAAR ,343,000 Normal ,000 1, ,000 10% 1,600 1,400 1,200 1,000 80% fall ,000 9% ,000 4% ,000 5% ,000 6% 2018Q2: 67% of Normal 2020Q4: 74% of Normal Trough to Current: Mar 09 = 353,000 Aug 18 = 876, % Source: Census Bureau and NAHB forecast.

29 Growth in Single-Family Permits August 2018 YTD vs. August 2017 YTD Rank Decline in Growth rate Growth rate < U.S. Growth rate U.S. Source: U.S. Census Bureau (BOC).

30 Single-Family Building Permits - Local Number of Units 24,000 20,000 41,407 Washington 45,000 40,000 35,000 16,000 12,000 8,000 4,000 18,281 Seattle-Tacoma-Bellevue, WA 12,991 5,036 24,136* 9,242* 30,000 25,000 20,000 15,000 10,000 5, Source: Census Bureau. Note: * 2018 permits are projected based on YTD data. 0

31 Single-Family Permits 12-Month Growth Rate Rank Growth Rate < 0 0 < Growth Rate < U.S. (6.6%) Growth Rate > U.S. (6.6%)

32 Typical New Home Size Decline after market shift 2600 Square Feet SF Starts: Median Floor Area SF Starts: Median 1 Year MA Source: Census Bureau.

33 70 60 Townhouse Market Expanding Thousands, NSA SF Starts: Attached Townhouse Share: 1-Year Moving Average 16% 14% 50 12% 40 10% % 6% 4% 2% % Source: U.S. Census Bureau (BOC).

34 Custom Home Building Market Thousands, NSA Owner/Contractor Built Units Owner/Contractor Built Share: 1-year Moving Average 45% 40% 35% 30% 25% % 15% 10% 5% % Source: U.S. Census Bureau (BOC).

35 Multifamily Housing Starts Leveling off Thousands of units, SAAR Avg=344, ,000 Normal , ,000 0% ,000-9% ,000 7% ,000-4% ,000-1% Trough to Current: 4 th Q 09 = 82,000 2 nd Q 18 = 365, % 76% fall 2018Q2: 110% of Normal 2020Q4: 109% of Normal Source: Census Bureau and NAHB forecast

36 140 Multifamily Construction Rental production dominates Thousands, NSA Percent 120% 120 Multifamily Housing Starts Built-for-Rent Share 100% % 80 60% % 20 20% %

37 Residential Remodeling Growth ahead Billions, SAAR Year Percent Change % % 2018 f 9% 2019 f 7% 2020 f 5% Actual Adjusted Source: U.S. Census Bureau (BOC) and National Association of Home Builders (NAHB) Forecasted.

38 Thank you eyeonhousing.org housingeconomics.com

Economic and Housing Outlook

Economic and Housing Outlook Home Builders Association of Virginia June 22, 2018 Robert Dietz, Ph.D. NAHB Chief Economist Housing Market Growing; Single-Family Lags Tax reform changes Macroeconomics post-tax