Figure 1: 30-Year Fixed Rate Mortgage
As the bulk of the Millennial generation begins to enter the 35-44 age bracket (key homebuyer age), housing demand for entry-level homes will continue to be strong, as new households are formed by this cohort made up of over 70mm people.1 While this demand driver has been present for some time, we believe we’re seeing an acceleration of homebuying among this generation due to the pandemic driving them out of urban centers to a more suburban lifestyle. The demand has been so strong that some homebuilders started withholding inventory in the second half of 2020 to ensure they had enough to sell in 2021; many homebuilders are facing a dearth of finished lot inventory relative to demand heading into 2021. Given this, we would expect homebuilders to have healthy profit margins in 2021 – assuming costs don’t increase at the same rate as home prices. Due to the supply-constrained housing market, coupled with record-low mortgage rates, the U.S. saw material home price appreciation (“HPA”) in the 12 months ended November 2020; according to the Burns Home Value Index,2 HPA is up 11% year-over-year and isn’t showing any signs of slowing down.
The demand void in the multifamily space left behind by Millennial homebuyers is projected to be absorbed by Gen Z as they are expected to behave similarly to Millennials in regard to anticipated household formation happening later in life and less financial priority on an initial home purchase. While the Millennial population is currently the largest, Gen Z is close behind with approximately 68mm people,1 propelling sufficient demand in the for-rent space. With the current single-family supply constraints and accelerated HPA, we expect the trend of longer-term renters to continue through this generational transition. Short-term impacts of the pandemic have driven demand and rent growth in lower-cost Sunbelt cities, which may continue depending on the long-term adaptation of remote work environments. Although there are some mitigating factors muting some of the affordability issues – such as HUD recently announcing material increases to FHA limits in December and the Biden administration proposing up to a $15k first-time homebuyer credit at the time of closing – the current housing market conditions likely make a home purchase unachievable in the near term for some hopeful first-time homebuyers. While it is expected that the new administration will continue to pass record stimulus packages in 2021, the quantum of stimulus contemplated will likely help keep people in their current living situation versus helping them buy a home.
Figure 2: Population by Age Cohort
Looking at the well documented migratory trend of people moving out of high-cost of living states such as California and New York to many of the Sunbelt states, we took a deeper dive into four markets (Phoenix, Salt Lake City, Houston and Tampa Bay) across the country that have been the beneficiaries of this migration. As jobs are created across the Sunbelt from companies establishing a larger presence, both residential and multifamily will see the benefits from the stratification of the jobs that are being created and/or relocated.
While the overall effect of the COVID-19 pandemic on asset classes such as office and retail is yet to be determined, it’s clear that people are voting with their feet and choosing to live in more suburban settings and lower costs housing markets – many of which are located in the Sunbelt. This migration is positive for these cities initially; however, an influx of new residents does come at an expense, as cost of living can swell and the existing infrastructure, not built to withstand the population increases, can be overwhelmed. Austin is a great example of the potential impacts of population growth with a significant increase of 32% between 2010-2020, representing a CAGR of 3% due to the influx of company relocations to the market. This resulted in a HPA CAGR of 6.6% and a rent growth CAGR of 2.3% from 2010-2020.5 Additionally, Austin now ranks among the worst in the country as it pertains to traffic and has become much more expensive than other high growth housing markets that are attracting new residents.
It remains to be seen how long these low-cost states and cities remain relatively cheap, given the increased residential demand relative to supply and ultimately where the revenue comes from to pay for the additional infrastructure that will inevitably need to be built.
Sources
1 U.S. Census Bureau, December 2020
2 John Burns Regional Analysis and Forecast, December 2020
3 U.S. Bureau of Labor Statistics, January 2021
4 FHFA, U.S. Census Bureau, Oxford Economics, December 2020
5 CoStar, January 2021
6 Utah.gov, December 2020
7 Oxford Economics, “City Economic Forecast”, September 2020
8 Oxford Economics, U.S. Census Bureau, December 2020
9 Oxford Economics, U.S. Bureau of Labor Statistics, December 2020
10 Oxford Economics, December 2020
11 CoStar, December 2020
12 Texas Monthly, “Houston Is Not Prepared for the Oil Bust”
13 JLL, “2020 Energy Outlook: Operating in a pandemic world”, November 2020
14 Rice.edu, “Transformation of Sears building into The Ion begins in May”, January 2019
15 MLS of the Houston Association of Realtors, “Houston Housing Blazes Its Way Through November”, December 2020
16 CoStar, Houston Daily Rents, January 2021
17 Axiometrics, December 2020
18 Greater Houston Partnership, “Economic Outlook: Houston Office, Multifamily Face Tough Road, Single-Family Housing on the Rise”, August 2020
19 BLS, MSA Payroll and Household Survey, November 2020
20 TampaBay.com, “Water Street Tampa’s First Luxury Condos Hit Market, starting at $2 million”, December 2020
21 CoStar, “Multi-Family Market Report: Tampa – FL”, November 2020
