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 reform Signs of growth momentum Signs of a future slowdown Housing demand and affordability Demographics positive Supply-side headwinds State-level economic measures Forecasts

Tax Reform

Tax Reform Policy Changes and Impacts Economic impacts GDP Marked up 218 forecast to 2.9% Dynamic scoring model suggests.8% more GDP after 1 years Business investment 1.1% higher after ten years Labor supply and employment.6% higher.9 million more workers in labor force Reduced home price growth to a positive 2.9% growth rate in 218 Proven to be incorrect - housing demand remains strong

Macroeconomics Post-Tax Reform

GDP Growth Stronger growth expected post-tax reform 1% 8% 6% Q/Q Percent Change, SAAR Annual Growth LT avg ( 58-7) 3.4% 216 1.5% 217 2.3% 218 f 2.9% 219 f 2.7% 22 f 1.8% 4% 2% % -2% -4% -6% -8% -1% 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 17 18 19 2 Source: U.S. Bureau of Economic Analysis (BEA) and NAHB forecast.

Dec 1854 Dec 1858 Jun 1861 Dec 1867 Dec 187 Mar 1879 May 1885 Apr 1888 May 1891 Jun 1894 Jun 1897 Dec 19 Aug 194 Jun 198 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 197 Mar 1975 Jul 198 Nov 1982 Mar 1991 Nov 21 12 Expansion is Aging Current expansion is 11 months old second longest Trough to Peak, Months 16 12 1 92 8 73 6 4 2 Source: The National Bureau of Economic Research (NBER).

Signs of Sustained Growth

Lower Energy Costs A tax cut that prevented a growth recession in 216 $16 Oil prices, FOB $ per Barrel Consumer Price Index, 1982-84=1 3 $14 25 $12 $1 2 $8 15 $6 1 $4 $2 $ West Texas Intermediate Spot: Cushing CPI - Energy 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 17 18 5 Source: U.S. Energy Information Administration (EIA) and U.S. Bureau of Labor Statistics (BLS).

Consumer Confidence Continues Positive Run 16 14 12 1 8 6 4 2 Index 1985=1, SA 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 17 18 Source: The Conference Board. 1.9.8.7.6.5.4.3.2.1

Tax Reform Boosts Potential GDP Added economic efficiencies yield more room to grow 25, Billions, 29 USD 22,5 Difference June, 217 April, 218 2, 17,5 15, 12,5 1, 7,5 5, 2,5 Billions USD 8 7 6 5 4 3 2 1 49 51 53 55 57 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 1 3 5 7 9 11 13 15 17 19 21 23 25 27 Source: Congressional Budget Office.

Corporate Profits Continue Rising 3, 2,5 $Billions, Pre-tax 14 12 2, 1 1,5 1, 5 8 6 4 2 9 91 92 93 94 95 96 97 98 99 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 17 18 19 2 Source: U.S. Bureau of Economic Analysis (BEA) and NAHB forecast.

Tax Cuts Help Disposable Income Growth Bonuses and wage growth will drive gains 14, Billions, 29 USD, SAAR 13, 12, 2.4% annual growth rate 11, 2.1% annual growth rate 1, 9, 8, 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 17 18 19 2 Source: U.S. Bureau of Economic Analysis (BEA) 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% 8% 79% Age 25-54 64% 63% 62% 61% 6% 78% 21 22 23 24 25 26 27 28 29 21 211 212 213 214 215 216 217 218 59% Source: U.S. Bureau of Labor Statistics (BLS).

Labor Productivity Growth Tax reform lifting above recent trend 7 6 5 4 3 2 Output/Hours Worked (4-Quarter Growth Rate) 14 12 1 8 6 1 4 2-1 9 91 92 93 94 95 96 97 98 99 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 17 18 19 2 Source: U.S. Bureau of Labor Statistics (BLS) and NAHB forecast.

Signs of Future Slowdown

Government Deficits Growing Post-tax reform deficits add up to 3 basis points to 1-year Treasury rate.8.4 $ Trillion Share of GDP, Percent Government Deficit (End of Fiscal Year) Government Deficit as a Share of GDP (End of Fiscal Year) 4% 2%. % -.4 -.8-1.2-2% -4% -6% -8% -1.6-1% 9 91 92 93 94 95 96 97 98 99 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 17 18 19 2 21 22 Source: U.S. Treasury Department and Bureau of Economic Analysis (BEA) and NAHB forecast.

Tight Labor Market How low can unemployment go? Percent, SA 4.5% Percent, SA 12% 4.% 3.5% 3.% 2.5% 2.% 1.5% 1.% Unemployment Rate Job Openings Rate 6 7 8 9 1 11 12 13 14 15 16 17 18 19 2 11% 1% 9% 8% 7% 6% 5% 4% 3% 2% Source: U.S. Bureau of Labor Statistics (BLS) and NAHB forecast.

Cumulative Change in Employment by Age Group Mind the Gen-X gap 2 Millions of Employees, SA 15 1 55 and Older 5 Under 55-5 -1 2 21 22 23 24 25 26 27 28 29 21 211 212 213 214 215 216 217 218 Source: U.S. Bureau of Labor Statistics (BLS).

Rising Producer Prices 25 2 15 1 5-5 12-month Percent Change, SA 1.9.8.7.6.5.4.3.2.1-1 48 5 52 54 56 58 6 62 64 66 68 7 72 74 76 78 8 82 84 86 88 9 92 94 96 98 2 4 6 8 1 12 14 16 18 Source: U.S. Bureau of Labor Statistics (BLS).

Consumer and Core Inflation Inflation pressures building Percent, SAAR 2 18 16 14 12 1 8 6 4 2-2 -4 CPI Core PCE -6-8 -1-12 79 8 81 82 83 84 85 86 87 88 89 9 91 92 93 94 95 96 97 98 99 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 17 18 19 2 Source: U.S. Bureau of Labor Statistics (BLS) and NAHB forecast.

9% Target Federal Funds Rate Fed will continue to raise rates 9% 8% 8% 7% 1-year Treasury 6.5% 7% 6% 6.% 5.3% 6% 5% 4.8% 5% 4% 3% 2.9% 3.3% 3.4% 3.1% 2.7% 4% 3% 2% 1.9% 2% 1% Federal Funds Rate 1% % 9 91 92 93 94 95 96 97 98 99 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 17 18 19 2 Source: Federal Reserve data and NAHB forecast. %

3-Year Fixed Rate Mortgage and 1-Year Treasury Rates will rise due to Fed policy and tight labor markets 12% 12% 1% 3-Year Fixed Rate Mortgage October 31, 216 1% 8% 8% 6% 6% 4% 1-Year Treasury 4% 2% Mortgage Risk Premium (Difference) 2% % 9 91 92 93 94 95 96 97 98 99 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 17 18 19 2 % Source: Federal Reserve and Freddie Mac data and NAHB forecast.

Flattening Yield Curve Necessary, but not sufficient, indicator of recession 2% Basis Points 4 15% 3 1% 2 5% 1 % -5% -1-1% -2-15% -3 4 Quarter Change -2% 1Yr-Fed Funds Rate Spread -25% 9 91 92 93 94 95 96 97 98 99 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 17 18 19 2-4 -5 Source: U.S. Board of Governors of the Federal Reserve System (FRB), the Conference Board and NAHB forecast.

Housing Demand and Affordability

Headship rates increase from 15% to 45% Rising Population Entering Housing Demand Years: 217 5. 4.5 Millions Avg=4.3 v 4. 3.5 3. 2.5 2. 1.5 Silent Generation: Born 1928-1945 Greatest Generation: Born Before 1928 1..5 Gen Z: Born After 1997 Millennials: Born 1981-1997 Gen X: Born 1965-198 Baby Boomers: Born 1946-1964. 4 8 12 16 2 24 28 32 36 4 44 48 52 56 6 64 68 72 76 8 84 88 92 96 1+

Household Balance Sheets A shift in debt away from mortgages 7.5% 7.% 6.5% % of Disposable Inc., SA 7.2% 6.7% Mortgage 8 7 6 6.% 5.5% 5.% 6.3% 6.% 5.8% Consumer 5.% 4.9% 5.9% 5 4 3 2 4.5% 4.4% 1 4.% 2 21 22 23 24 25 26 27 28 29 21 211 212 213 214 215 216 217 Source: U.S. Board of Governors of the Federal Reserve System (FRB).

Consumer Debt Rise in student and auto loans 25% 23% 8 2% Student Loans 7 6 15% Other Auto Loans 152% 5 4 1% 8% 95% 94% 3 5% Credit Cards 2 1 % 23 24 25 26 27 28 29 21 211 212 213 214 215 216 217 218 Source: Federal Reserve Bank of New York.

Existing Home Sales Low inventory 8, Thousands Months Supply (Months, NSA) 14 7, 6, Months Supply Existing Home Sales 12 1 5, 8 4, 3, 6 2, Existing Home Inventory 4 1, Existing Home Sales: Single-Family & Condo & Co-op, (Ths., SAAR) Number of homes available for sale: Single-Family & Condo & Co-op, (Ths., NSA) 5 6 7 8 9 1 11 12 13 14 15 16 17 18 Source: National Association of Realtors (NAR). 2

S&P/Case-Shiller National US Home Price Index Prices growing faster than income Percent Growth, SAAR 2 15 1 5-5 -1-15 -2 87 88 89 9 91 92 93 94 95 96 97 98 99 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 17 18 19 2 Source: S&P Dow Jones Indices LLC; CoreLogic, Inc. and NAHB forecast.

Housing Affordability NAHB/Wells Fargo HOI 63% of homes sold in Deltona-Daytona Beach MSA were affordable in Q1 218 9 8 78 7 6 National 62 5 4 3 2 Q1_4 Q1_5 Q1_6 Q1_7 Q1_8 Q1_9 Q1_1 Q1_11 Q1_12 Q1_13 Q1_14 Q1_15 Q1_16 Q1_17 Q1_18 Source: NAHB/Wells Fargo Housing Opportunity Index.

Simulating Future Affordability Conditions HOI in Daytona Beach MSA declines more than 1% due to higher rates and costs/prices despite rising incomes 9 8 78 7 6 Source: NAHB/Wells Fargo Housing Opportunity Index. National 62 Q2 219, 56, with 5% mortgage rate 5 Distribution of MSAs by change in the HOI using 4 forecast prices, income, and interest rates Declines of more than 1% 37% Declines of 5 to 1% 25% 3 No change to 4% decline 36% Gain of 1 to 5% 1% 2 Q1_4 Q1_5 Q1_6 Q1_7 Q1_8 Q1_9 Q1_1 Q1_11 Q1_12 Q1_13 Q1_14 Q1_15 Q1_16 Q1_17 Q1_18 Q1_19 Q1_2

Supply-Side Headwinds

Building Materials Softwood Lumber Since January 217, Random Lengths Framing Composite Price Index up 55% 27 Index 1982=1, NSA 263 25 23 21 19 17 15 212 213 214 215 216 217 218 Source: U.S. Bureau of Labor Statistics (BLS).

Building Materials OSB Since January 217, OSB increased 26.8% 3 Index 1982=1, NSA 25 256 2 15 1 5 212 213 214 215 216 217 218 Source: U.S. Bureau of Labor Statistics (BLS).

Building Materials Gypsum Since January 217, gypsum products increased 1.1% 4 Index 1982=1, NSA 35 339 3 25 2 15 212 213 214 215 216 217 218 Source: U.S. Bureau of Labor Statistics (BLS).

Labor Elevated count of unfilled construction jobs 5.% 4.5% 4.% 3.5% 3.% 2.5% 2.% 1.5% 1.%.5% Job openings rate - Construction 12-month moving average 1..9.8.7.6.5.4.3.2.1.% 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 17 18 Source: U.S. Bureau of Labor Statistics (BLS). -

Aging Labor Force for Construction

Construction Sector Productivity Lagging overall economy Index, 1993 = 1 1.6 Construction Worker Productivity Overall Worker Productivity 1.4 1.2 1..8.6.4 93 94 95 96 97 98 99 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 17

Lots Housing Starts (Area) and Low/Very Low Lot Supply (bars) 2,1 Starts (Thousands) Low Supply 7% 1,8 6% 1,5 5% 1,2 4% 9 3% 6 2% 3 1% 97 98 99 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 17 18 %

Lending AD&C Access $2, $18, $16, $14, $12, $1, $8, $6, $4, $2, Millions 1-4 unit Residential Construction Loans Year-over-Year Growth Rates 2% 18% 16% 14% 12% 1% 8% 6% 4% 2% $- 7 8 9 1 11 12 13 14 15 16 17 18 %

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

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.% 5.9% 3.9% 4.% 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 1 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.

Continuing Growth in Regulatory Requirements Currently 24% price of a newly-built home New Solar requirement in California Almost all new homes by 22 must have solar panels Add $8, to $12, per home Save $7 in energy cost a year 14-15 year payback period Costs fall harder on entry-level and first time buyers

A Local Look

Florida Real GDP Growth 15% Q/Q Percent Change (annualized), SAAR 1% 5% % -5% -1% -15% 5 6 7 8 9 1 11 12 13 14 15 16 17

Population Growth Volusia County population grew faster than national and statewide rates 5, 4, 3, Thousands 21 211 212 213 214 215 216 217 U.S..8%.7%.8%.7%.8%.8%.7%.7% Florida 1.% 1.3% 1.3% 1.3% 1.6% 1.9% 1.9% 1.6% Volusia County.%.%.5%.8% 1.3% 2.% 2.2% 1.8% 39,338 311,644 313,993 316,235 318,623 321,4 323,46 Thousands 325,719 3, 25, 2, 15, 2, 18,846 19,97 19,341 19,585 19,898 2,269 2,657 2,984 1, 1, 5, 494 494 497 51 57 518 529 539 21 211 212 213 214 215 216 217 United States Florida Volusia

Payroll Employment Daytona Beach MSA above pre-recession peak 8,7 8,2 7,7 Thousands, SA Florida 193 8,51 Thousands, SA 19% 16% 22 21 2 19 7,2 6,7 6,2 89% 89% Deltona-Daytona Beach-Ormond Beach MSA 18 17 16 5,7 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 17 18 15

26 24 22 2 18 Existing House Price Index Daytona Beach MSA below pre-recession peak 2Q1 = 1, SA Relative to Pre-recession Peak US Florida Daytona Beach Recession-era Low 81% 55% 49% Current 11% 92% 86% 1.9.8.7.6.5 16 Florida.4 14 12 United States Deltona-Daytona Beach-Ormond Beach MSA.3.2.1 1 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 17 18

Forecasts

Household Formation Demand for home ownership strengthening 2, Y/Y Change in Household Count, Thousands, NSA 1,5 Owner-Occupied 1, 5-5 -1, 2,5 2, 1,5 1, 5-5 -1, Renter-Occupied 21 211 212 213 214 215 216 217 218 Source: U.S. Census Bureau (BOC): Housing Vacancies & Homeownership.

Homeownership Rate 71% Percentage, Quarterly, SA 1. 7% 69% 68% 67% 66% 69.4%.9.8.7.6.5 65% 64% 63% 62% 61% 64.2% 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 17 18.4.3.2.1 - Source: U.S. Census Bureau (BOC): Housing Vacancies & Homeownership.

NAHB/Wells Fargo Housing Market Index Nearly two-decade high for builder confidence 8 Index Thousands, SAAR 2, 7 6 HMI 68 1,8 1,6 1,4 5 4 Single-Family Starts 1,2 1, 3 8 2 6 4 1 2 5 6 7 8 9 1 11 12 13 14 15 16 17 18 Source: Census Bureau and NAHB/Wells Fargo HMI survey.

Single-Family Starts Modest growth ahead 2, Thousands of units, SAAR 2-23 1,343, Normal 215 712, 1,8 216 784, 1% 1,6 1,4 1,2 1, 8% fall 217 851, 9% 218 99, 7% 219 959, 5% 22 1,3, 5% 218Q1: 66% of Normal 22Q4: 76% of Normal 8 6 4 2 Trough to Current: Mar 9 = 353, May 18 = 936, +165% 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 17 18 19 2 Source: Census Bureau and NAHB forecast.

Single Family Housing Starts Trough and Current Source: Census Bureau. National average single family starts bottomed out at 27% in early 29 and reached 66% of normal in 218Q1. % 1% 2% 3% 4% 5% 6% 7% 8% 9% 1% 11% 12% 13% 14% 15% 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 2-3 Starts US

Single-Family Building Permits Florida and Volusia County 25, Number of Units Number of Units 6, 2, 5,68 29,162 5, 15, 4, 3, 1, 5, 85,267 1,923 26,636 513 9 91 92 93 94 95 96 97 98 99 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 17 2, 1, Source: U.S. Census Bureau (BOC).

Single-Family Permits 12-Month Growth Rate

Home Prices of New and Existing Homes Wide gap since 212 $36, Median Sales Price Difference $12, $3, $1, $24, New Homes $8, $18, $6, $12, Existing Homes $4, $6, 199-28 Avg: $2, $2, $ 9 91 92 93 94 95 96 97 98 99 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 17 18 $

Typical New Home Size Decline after market shift 26 Square Feet 25 24 23 22 21 2 19 18 17 SF Starts: Median Floor Area SF Starts: Median 1 Year MA 16 99 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 17 18

7 6 Townhouse Market Expanding Thousands, NSA SF Starts: Attached Townhouse Share: 1-Year Moving Average 16% 14% 5 12% 4 1% 3 2 1 8% 6% 4% 2% 9 91 92 93 94 95 96 97 98 99 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 17 18 %

Multifamily Housing Starts Leveling off 55 5 45 4 Thousands of units, SAAR Avg=344, 1995-23 331, Normal 215 394, 216 393, % 217 356, -9% 218 377, 6% 219 354, -6% 22 351, -1% 35 3 25 2 15 1 5 Trough to Current: 4 th Q 9 = 82, 1 st Q 18 = 427, +421% 76% fall 218Q1: 129% of Normal 22Q4: 15% of Normal 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 17 18 19 2 Source: Census Bureau and NAHB forecast

National average multifamily starts bottomed out at 25% in late 29 and were 129% of normal in 218Q1. Multifamily Housing Starts Trough and Current Source: Census Bureau. -25% % 25% 5% 75% 1% 125% 15% 175% 2% 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 1995-23 Starts US

Multifamily Building Permits Florida and Volusia County 9, 8, 7, Number of Units Florida 1,816 78,88 Number of Units 2, 1,75 1,5 6, 5, 4, 3, 2, 1, 37,452 Volusia 8,639 8 9 91 92 93 94 95 96 97 98 99 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 17 1,25 1, 75 5 25 Source: U.S. Census Bureau (BOC).

Residential Remodeling Strong market conditions 25 225 2 175 15 Billions, SAAR Year Percent Change 216 11% 217 17% 218 f 7% 219 f 8% 22 f 6% Actual 125 1 75 Adjusted 5 25 94 95 96 97 98 99 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 17 18 19 2 Source: Census Bureau and NAHB forecast.

The Age of the Housing Stock Typical home is almost 4 years old 45% 4% 38% 25 215 35% 3% 32% 25% 2% 15% 1% 12% 15% 16% 13% 15% 17% 15% 16% 9% 5% % 45 years old or more 35-45 25-35 15-25 5-15 5 years old or less 3%

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