Economic and Housing Outlook

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1 Economic and Housing Outlook Home Builders Association of Virginia June 22, 2018 Robert Dietz, Ph.D. NAHB Chief Economist

2 Housing Market Growing; Single-Family Lags Tax reform changes Macroeconomics post-tax reform Signs of growth momentum Signs of a future slowdown Housing demand and affordability Demographics positive Supply-side headwinds State-level economic measures Forecasts

3 Macroeconomics Post-Tax Reform

4 Tax Reform Policy Changes and Impacts Economic impacts GDP Marked up 2018 forecast to 2.7% Dynamic scoring model suggests 0.8% more GDP after 10 years Business investment 1.1% higher after ten years Labor supply and employment 0.6% higher 0.9 million more workers in labor force Reduced home price growth to a positive 2.9% growth rate in 2018 Incoming data shows no such effect

5 Tax Reform Boosts Potential GDP Added economic efficiencies yield more room to grow 25,000 Billions, 2009 USD 22,500 Difference June, 2017 April, ,000 17,500 15,000 12,500 10,000 7,500 5,000 2,500 Billions USD Source: Congressional Budget Office.

6 Tax Cuts Help Disposable Income Growth Bonuses and wage growth will drive gains 14,000 Billions, 2009 USD, SAAR 13,000 12, % annual growth rate 11, % annual growth rate 10,000 9,000 8, Source: U.S. Bureau of Economic Analysis (BEA) and NAHB forecast.

7 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 2.7% 2020 f 1.8% 4% 2% 0% -2% -4% -6% -8% -10% Source: U.S. Bureau of Economic Analysis (BEA) and NAHB forecast.

8 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 108 months old second longest Trough to Peak, Months Source: The National Bureau of Economic Research (NBER).

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 Tight Labor Market How low can unemployment go? Percent, SA 4.5% Percent, SA 12% 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.

11 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).

12 Government Deficits Growing Post-tax reform deficits add up to 30 basis points to 10-year Treasury rate $ Trillion Share of GDP, Percent 0.8 Government Deficit (End of Fiscal Year) Government Deficit as a Share of GDP (End of Fiscal Year) 0.4 4% 2% 0.0 0% % -4% -6% -8% % Source: U.S. Treasury Department and Bureau of Economic Analysis (BEA) and NAHB forecast.

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 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

16 Consumer Debt Rise in student and auto loans 250% 8 200% Student Loans 226% % 100% Other 80% Auto Loans 151% 97% 95% % Credit Cards 2 1 0% Source: Federal Reserve Bank of New York.

17 Existing Home Sales Low inventory 8,000 Thousands Months Supply (Months, NSA) 14 7,000 6,000 Months Supply Existing Home Sales , ,000 3, ,000 Existing Home Inventory 4 1,000 0 Existing Home Sales: Single-Family & Condo & Co-op, (Ths., SAAR) Number of homes available for sale: Single-Family & Condo & Co-op, (Ths., NSA) Source: National Association of Realtors (NAR). 2 0

18 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.

19 Housing Affordability NAHB/Wells Fargo HOI Affordability declining National Q1_04 Q1_05 Q1_06 Q1_07 Q1_08 Q1_09 Q1_10 Q1_11 Q1_12 Q1_13 Q1_14 Q1_15 Q1_16 Q1_17 Q1_18 Source: NAHB/Wells Fargo Housing Opportunity Index.

20 Simulating Future Affordability Conditions HOI declines due to higher rates and costs/prices despite rising incomes National 62 Q2 2019, 56, with 5% mortgage rate 50 Distribution of MSAs by change in the HOI using 40 forecast prices, income, and interest rates Declines of more than 10% 37% Declines of 5 to 10% 25% 30 No change to 4% decline 36% Gain of 1 to 5% 1% 20 Q1_04 Q1_05 Q1_06 Q1_07 Q1_08 Q1_09 Q1_10 Q1_11 Q1_12 Q1_13 Q1_14 Q1_15 Q1_16 Q1_17 Q1_18 Q1_19 Q1_20 Source: NAHB/Wells Fargo Housing Opportunity Index.

21 Supply-Side Headwinds

22 Building Materials Softwood Lumber Since January 2017, Random Lengths Framing Composite Price Index up 63% 270 Index 1982=100, NSA Source: U.S. Bureau of Labor Statistics (BLS).

23 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). -

24 Construction Sector Productivity Lagging overall economy Index, 1993 = Construction Worker Productivity Overall Worker Productivity

25 Regulatory Costs Rising Up 29% Over Last 5 Years Total effect of building codes, land use, environmental and other rules

26 Regulations - 32% of Multifamily Development Costs New NAHB-NMHC research Government Regulations as a Share of Multifamily Development Costs 42.6%* 21.7%* 5.2% 32.1% 7.0% 5.9% 3.9% 4.0% 4.2% 2.3% 4.8% 7.1% 8.4% 5.4% 5.3% 5.5% 2.3% 7.3% Cost increases from changes to building codes over the past 10 years Development requirements that go beyond the ordinary Fees charged when building construction is authorized Cost of applying for zoning approval Other (non-refundable) fees charged when site work begins Cost of complying with OSHA requirements Others Lower Quartile Average Upper Quartile Note: * For quartiles, all types of costs do not sum to the total. Source: NAHB/Wells Fargo HMI survey.

27 A Local Look

28 Virginia GDP Growth 8% Q/Q Percent Change (annualized), SAAR 6% 4% 2% 0% -2% -4% -6% -8%

29 Population Growth Virginia population grew slower in recent years 8,600 8,500 8,400 8,300 Thousands U.S. 0.8% 0.7% 0.8% 0.7% 0.8% 0.8% 0.7% 0.7% Virginia 1.3% 1.0% 1.0% 0.9% 0.7% 0.6% 0.6% 0.7% 316, , , ,406 Thousands 325, , , ,000 8, , ,000 8, , , ,000 8,000 7, ,000 7,800 8,025 8,108 8,189 8,262 8,317 8,367 8,414 8, ,000 IUSA Virginia

30 Payroll Employment Virginia above pre-recession peak 4,100 Thousands, SA 4, % 3,900 3,800 3,789 3,700 3,600 3,500 95% 3,400 3,

31 Existing House Price Index Virginia below pre-recession peak 2000Q1 = 100, SA Relative to Pre-recession Peak US Virginia Recession-era Low 81% 83% Current 110% 98% Virginia United States

32 Forecasts

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

34 Homeownership Rate 71% Percentage, Quarterly, SA % 69% 68% 67% 66% 69.4% % 64% 63% 62% 61% 64.2% Source: U.S. Census Bureau (BOC): Housing Vacancies & Homeownership.

35 NAHB/Wells Fargo Housing Market Index Nearly two-decade high for builder confidence 80 Index Thousands, SAAR 2, HMI 70 1,800 1,600 1, Single-Family Starts 1,200 1, Source: Census Bureau and NAHB/Wells Fargo HMI survey.

36 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 7% ,000 5% ,003,000 5% 2018Q1: 66% of Normal 2020Q4: 76% of Normal Trough to Current: Mar 09 = 353,000 Apr 18 = 894, % Source: Census Bureau and NAHB forecast.

37 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 110% 120% 130% 140% 150% M I N V I L A Z M N C O C A F L G A O H I N M O W I N H C T R I O R N J M D I D K Y U T A K K S M A V T N M N C M E H I V A N Y P A T N I A W V W A D C N E D E S C S D M S N D A R T X A L O K M T L A W Y Current Trough Housing Starts / Average Starts US Single Family Housing Starts Trough and Current Source: Census Bureau. National average single family starts bottomed out at 27% in early 2009 and reached 66% of normal in 2018Q1.

38 Single-Family Building Permits Virginia 60,000 Number of Units ,000 40,000 30,000 49, ,000 10,000 15,625 22, Source: U.S. Census Bureau (BOC).

Single Family Permits 12-Months Growth Rate Kingsport-Bristol- Bristol, TN-VA Rank Growth Rate < 0 0 < Growth Rate < U.S. Growth Rate > U.S. Blacksburg- Christiansburg- Radford, VA

39 Single Family Permits 12-Months Growth Rate Kingsport-Bristol- Bristol, TN-VA Rank Growth Rate < 0 0 < Growth Rate < U.S. Growth Rate > U.S. Blacksburg- Christiansburg- Radford, VA Harrisonburg, VA Staunton- Waynesboro, VA Charlottesville, VA Lynchburg, VA Winchester, VA-WV Washington- Arlington-Alexandria, DC-VA-MD-WV Richmond, VA Virginia Beach-Norfolk-Newport News, VA-NC

40 Home Prices of New and Existing Homes Wide gap since 2012 $360,000 Median Sales Price Difference $120,000 $300,000 $100,000 $240,000 New Homes $80,000 $180,000 $60,000 $120,000 Existing Homes $40,000 $60, Avg: $20,000 $20,000 $ $0

41 Typical New Home Size Decline after market shift 2600 Square Feet SF Starts: Median Floor Area SF Starts: Median 1 Year MA

42 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% %

43 Multifamily Housing Starts Leveling off Thousands of units, SAAR Avg=344, ,000 Normal , ,000 0% ,000-9% ,000 6% ,000-6% ,000-1% Trough to Current: 4 th Q 09 = 82,000 1 st Q 18 = 427, % 76% fall 2018Q1: 129% of Normal 2020Q4: 105% of Normal Source: Census Bureau and NAHB forecast

44 National average multifamily starts bottomed out at 25% in late 2009 and were 129% of normal in 2018Q1. Multifamily Housing Starts Trough and Current Source: Census Bureau. -25% 0% 25% 50% 75% 100% 125% 150% 175% 200% 225% M I A Z N V C O A K G A I D O R N M R I F L S C O H M T N E I L W I C A W A M N M S K S K Y H I I N O K T X I A W V P A T N M O W Y L A U T N C M D N Y A L V T M E V A A R S D M A N D N H D C N J C T D E Current Trough Housing Starts / Average Starts US

45 Multifamily Building Permits Virginia 16,000 Number of Units 14,000 12,000 10,000 8,000 6,000 14,230 11, ,000 2, , Source: U.S. Census Bureau (BOC).

46 Residential Remodeling Strong market conditions Billions, SAAR Year Percent Change % % 2018 f 7% 2019 f 8% 2020 f 6% Actual Adjusted Source: Census Bureau and NAHB forecast.

47 The Age of the Housing Stock Typical home is almost 40 years old 45% 40% 38% % 30% 32% 25% 20% 15% 10% 12% 15% 16% 13% 15% 17% 15% 16% 9% 5% 0% 45 years old or more years old or less 3%

48 Thank you eyeonhousing.org housingeconomics.com

Economic and Housing Outlook

Economic and Housing Outlook Volusia Building Industry Association July 18, 218 Robert Dietz, Ph.D. NAHB Chief Economist Housing Market Growing; Single-Family Lags Tax reform changes Macroeconomics post-tax