Rising Risks for the Housing Outlook

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

Population Growth Pierce County population growing faster than national and statewide rates 890 840 790 Thousands 2010 2011 2012 2013 2014 2015 2016 2017 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 6,500 740 6,000 690 795 803 811 819 829 841 860 877 2010 2011 2012 2013 2014 2015 2016 2017 5,500 Source: U.S. Census Bureau (BOC). Washington Pierce

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 2,000 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 1,200 Source: U.S. Bureau of Labor Statistics (BLS).

260 240 220 200 180 160 140 120 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 1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 100 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 Source: U.S. Federal Housing Finance Agency (FHFA). 0

Washington Real GDP Growth 15% Q/Q Percent Change (annualized), SAAR 10% 5% 5% 6% 3% 4% 0% -5% -10% -15% 05 06 07 08 09 10 11 12 13 14 15 16 17 Source: U.S. Bureau of Economic Analysis (BEA).

GDP Growth Stronger growth expected post-tax reform 10% 8% 6% Q/Q Percent Change, SAAR Annual Growth LT avg ( 58-07) 3.4% 2016 1.6% 2017 2.2% 2018 f 2.9% 2019 f 2.6% 2020 f 1.8% 4% 2% 0% -2% -4% -6% -8% -10% 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 Source: U.S. Bureau of Economic Analysis (BEA) and NAHB forecast.

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 2001 120 Expansion is Aging Current expansion is 113 months old second longest Trough to Peak, Months 106 120 100 92 80 73 60 40 20 0 Source: National Bureau of Economic Research (NBER).

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 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 11% 10% 9% 8% 7% 6% 5% 4% 3% 2% Source: U.S. Bureau of Labor Statistics (BLS) and NAHB forecast.

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 25-54 64% 63% 62% 61% 60% 78% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 59% Source: U.S. Bureau of Labor Statistics (BLS).

Cumulative Change in Employment by Age Group Mind the Gen-X gap 20 Millions of Employees, SA 15 10 55 and Older 5 0 Under 55-5 -10 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: U.S. Bureau of Labor Statistics (BLS).

Consumer and Core Inflation Inflation pressures building Percent, SAAR 20 18 16 14 12 10 8 6 4 2 0-2 -4 CPI Core PCE -6-8 -10-12 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 Source: U.S. Bureau of Labor Statistics (BLS) and NAHB forecast.

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% 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 Source: Federal Reserve data and NAHB forecast. 0%

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, 2016 10% 8% 8% 6% 6% 4% 10-Year Treasury 4% 2% Mortgage Risk Premium (Difference) 2% 0% 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 0% Source: Federal Reserve and Freddie Mac data and NAHB forecast.

Housing Demand and Affordability

Consumer Confidence Continues Positive Run 160 140 120 100 80 60 40 20 0 Index 1985=100, SA 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 Source: The Conference Board. 1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0

Headship rates increase from 15% to 45% Rising Population Entering Housing Demand Years: 2017 5.0 4.5 Millions Avg=4.3 v 4.0 3.5 3.0 2.5 2.0 1.5 Silent Generation: Born 1928-1945 Greatest Generation: Born Before 1928 1.0 0.5 Gen Z: Born After 1997 Millennials: Born 1981-1997 Gen X: Born 1965-1980 Baby Boomers: Born 1946-1964 0.0 0 4 8 12 16 20 24 28 32 36 40 44 48 52 56 60 64 68 72 76 80 84 88 92 96 100+

Household Formation Demand for home ownership strengthening 2,500 Y/Y Change in Household Count, Thousands, NSA Owner-Occupied 2,000 1,500 1,000 500 0-500 -1,000 2,500 2,000 1,500 1,000 500 0-500 -1,000 Renter-Occupied 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: U.S. Census Bureau (BOC): Housing Vacancies & Homeownership.

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 34 1990 2000 2002 2004 2006 2008 2010 2012 2014 2016 Source: US Census 1990, 2000, PUMS, 2000-2016 ACS, PUMS, NAHB Estimates. 17% 15% 13% 11% 9%

Homeownership Rate 71% Percentage, Quarterly, SA 1.00 70% 69% 68% 67% 66% 69.4% 0.90 0.80 0.70 0.60 0.50 65% 64% 63% 62% 61% 64.4% 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 0.40 0.30 0.20 0.10 - Source: U.S. Census Bureau (BOC): Housing Vacancies & Homeownership.

S&P/Case-Shiller National US Home Price Index Prices growing faster than income Percent Growth, SAAR 20 15 10 5 0-5 -10-15 -20 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 Source: S&P Dow Jones Indices LLC; CoreLogic, Inc. and NAHB forecast.

Housing Affordability NAHB/Wells Fargo HOI 90 80 86 78 70 60 50 National 57 40 30 Tacoma-Lakewood, WA 38 20 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: NAHB/Wells Fargo Housing Opportunity Index.

Existing Single-Family Home Sales 7 Million Units, SAAR 6 5 4 3 2 1 0 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 Source: National Association of Realtors (NAR) and NAHB forecast.

Supply-Side Factors

Building Materials Lumber Prices Since January 2017, lumber prices increased 9%; 63% at peak $600 $550 $ per thousand board feet 582 $500 $450 $400 389 $350 $300 $250 2015 2015 2016 2016 2017 2017 2018 Source: NAHB Analysis; Random Lengths Composite Index.

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 1.00 0.90 0.80 0.70 0.60 0.50 0.40 0.30 0.20 0.10 0.0% 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 Source: U.S. Bureau of Labor Statistics (BLS). -

Construction Sector Productivity Lagging overall economy Index, 1993 = 1 1.6 Construction Worker Productivity Overall Worker Productivity 1.4 1.2 1.0 0.8 0.6 0.4 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 Source: U.S. Bureau of Labor Statistics (BLS).

Construction Outlook

Single-Family Starts Modest growth ahead 2,000 Thousands of units, SAAR 2000-2003 1,343,000 Normal 2015 713,000 1,800 2016 785,000 10% 1,600 1,400 1,200 1,000 80% fall 2017 852,000 9% 2018 885,000 4% 2019 927,000 5% 2020 979,000 6% 2018Q2: 67% of Normal 2020Q4: 74% of Normal 800 600 400 200 Trough to Current: Mar 09 = 353,000 Aug 18 = 876,000 +148% 0 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 Source: Census Bureau and NAHB forecast.

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).

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 5,000 0 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 Source: Census Bureau. Note: * 2018 permits are projected based on YTD data. 0

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

Typical New Home Size Decline after market shift 2600 Square Feet 2500 2400 2300 2200 2100 2000 1900 1800 1700 SF Starts: Median Floor Area SF Starts: Median 1 Year MA 1600 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 Source: Census Bureau.

70 60 Townhouse Market Expanding Thousands, NSA SF Starts: Attached Townhouse Share: 1-Year Moving Average 16% 14% 50 12% 40 10% 30 20 10 8% 6% 4% 2% 0 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 0% Source: U.S. Census Bureau (BOC).

Custom Home Building Market 140 120 100 80 Thousands, NSA Owner/Contractor Built Units Owner/Contractor Built Share: 1-year Moving Average 45% 40% 35% 30% 25% 60 40 20 20% 15% 10% 5% 0 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 0% Source: U.S. Census Bureau (BOC).

Multifamily Housing Starts Leveling off 550 500 450 400 Thousands of units, SAAR Avg=344,000 1995-2003 331,000 Normal 2015 394,000 2016 393,000 0% 2017 356,000-9% 2018 383,000 7% 2019 366,000-4% 2020 364,000-1% 350 300 250 200 150 100 50 Trough to Current: 4 th Q 09 = 82,000 2 nd Q 18 = 365,000 +345% 76% fall 2018Q2: 110% of Normal 2020Q4: 109% of Normal 0 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 Source: Census Bureau and NAHB forecast

140 Multifamily Construction Rental production dominates Thousands, NSA Percent 120% 120 Multifamily Housing Starts Built-for-Rent Share 100% 100 80% 80 60% 60 40 40% 20 20% 0 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 0%

Residential Remodeling Growth ahead 250 225 200 175 150 125 100 Billions, SAAR Year Percent Change 2016 12% 2017 19% 2018 f 9% 2019 f 7% 2020 f 5% Actual 75 50 Adjusted 25 0 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 Source: U.S. Census Bureau (BOC) and National Association of Home Builders (NAHB) Forecasted.

Thank you Questions? rdietz@nahb.org @dietz_econ eyeonhousing.org housingeconomics.com