Kermit Baker is a senior research fellow at the Joint Center for Housing at Harvard University and the project director of the Remodeling Futures Program. The goal of this program is to develop an improved understanding of the dynamics of the U.S. repair and renovation industry so businesses can better take advantage of opportunities the market offers. Baker is also chief economist for the American Institute of Architects. In this role, he analyzes business and construction trends for the U.S. economy.
Baker took questions from Hardware Retailing about the current state of the housing market, as well as what to expect for 2017.
Hardware Retailing (HR): What kind of growth have you seen in existing home sales this past year?
Kermit Baker (KB): The market for existing-home sales has been recovering. We are getting close to about 5 million at an annualized rate, which are the numbers we were seeing before the downturn. Recovery has been slow and steady, but it’s picking up momentum, so that’s a healthy sign. There had been quite a few homeowners who were underwater on their homes and couldn’t sell, but we are now seeing fewer and fewer owners in that situation.
There’s been more job growth, too. A homeowner may want to sell and move across the country for a new job, and now they can do that more easily than in the past few years. This segment of the market seems to be unfreezing pretty nicely.
HR: What about growth in new housing starts?
KB: There are two types: multifamily homes and single-family homes. Multifamily came back from the recession a lot stronger, as there was more demand for rentals as we came out of the recession.
We’ve seen some reasonably healthy growth in single-family construction, too, but it’s still well below where I’d say is the trend line for the market. It will continue to grow, though, I think.
There is a lot of potential on the single-family side of the market, but not as much on the multifamily side, as some of those markets may be not only saturated, but overbuilt.
HR: What does the remodeling segment look like?
KB: According to our estimates, 2015 was the year we reached a new record high for spending on remodeling projects. We matched or exceeded what we saw in 2007, which was when we were at the peak, before the downturn began.
We’ve seen healthy growth in 2016, and that same growth is projected for 2017. I think some of the upper end of the market disappeared— we aren’t seeing as many of those $150,000 kitchen remodels as we had before. There aren’t those high-priced projects you were hearing about before the downturn, but it’s still strong. Contractors are, in some cases, overwhelmed. They are continuing to get projects done and continuing to look for more labor.
HR: What are the biggest housing trends that we should be looking at as we head into 2017?
KB: There are two we should really consider. One is the split between single-family and multifamily housing and how those markets have recovered so differentially. Multifamily home prices are about 40 percent above what they were at their last peak. We also have a strong single-family market; prices are OK, but not anywhere near that level.
I think that plays in to the second trend: We’ve seen some pretty significant declines in the homeownership rate. In fact, reports from over the summer say the national homeownership rate is the lowest it’s been in 50 years. By and large, our population is getting older, and those are the ones who are more likely to be homeowners, so to see that rate so low is pretty dramatic.
As far as younger people becoming homeowners, one of the biggest challenges continues to be saving up for a down payment and finding financing. Financing is much more difficult to get than it was a decade or so ago.
During and right after the recession, there was a large number of those under 30 living at home, and that number is starting to come down, too.
In 2010, at the lowest point of the downturn, those in their 20s or 30s, at an age where
you might be more likely to be a first-time homebuyer, were not buying homes. The peak year of birth was 1990, and people tend to buy in their late 20s or early 30s, so those born in 1990 are moving into that buying stage. We might see higher rates of homeownership in the near future. The economy is improving and there are favorable demographics and a favorable housing market—these factors all could help the homeownership rate rise.
HR: What do these trends and statistics have to say about the economy as a whole?
KB: Quite frankly, I think it’s doing pretty well. When you listen to economists talk about what might happen next year, one of the bright spots is the topic of single-family construction. It’s been slow in recovering, but that recovery has to happen at some point.
There are also generally favorable consumer confidence scores, which tend to correlate with the unemployment rate. For a typical consumer, that’s good news. There’s a lot of optimism from the consumer perspective, which is the most critical factor in generating economic growth. Home prices are going up, and while mortgage rates are going up, they are still surprisingly low, so there are good reasons to take out or refinance a mortgage.
People are also taking out home equity loans, some for as many as $20,000, $30,000 or $40,000. That money is traditionally used for home improvements. Many aren’t too inclined to trade up to a nicer home where they might have a mortgage with a higher interest rate, so they improve their homes instead.
HR: What should retailers be aware of as we head into 2017?
KB: The fundamentals look pretty favorable. I think we will continue to see strong house prices. Households continue to build up equity, which encourages home improvement activity. We’re seeing a lot of smaller remodeling projects. Contractors are working hard to keep up. They have to ask themselves if they have the labor to staff those jobs, and they may be running in to material shortages. This hasn’t been an issue in so long that we’ve kind of forgotten about it, but now more and more people want to buy or fix up a home.