2019 Economic Housing Forecast Luncheon - Ivy Zelman Summary

November 12, 2019

Contact: Brenda Callaghan, Executive Director

               HBA of Greater Cleveland

               6140 West Creek Rd.

               Independence OH 44131   

               216-447-8700

               info@hbacleveland.com

 

HBA homebuilders use recent economic housing forecast to build what homebuyers want and need

Cleveland is an untapped market for newly constructed, single-family rental houses. The need for that type of housing is gaining momentum. Home builders looking toward the future may find part of their success in rental construction. And Clevelanders (particularly millennials starting families) could benefit by getting a housing lifestyle they now want and can afford.

Ivy Zelman, chief executive officer of Zelman and Associates, a housing research and investment banking firm in Beachwood, delivered that important message and others as the keynote speaker at the 2019 Home Builders Association (HBA) of Greater Cleveland’s Economic Housing Forecast luncheon. The sold-out event on November 7 at Corporate College East in Warrensville Heights was sponsored by First Federal Lakewood.

The forecast helps builders determine where, what and for whom to build, based on buyers’ needs and wants well as economic conditions. Those decisions have a direct impact on home buyers.

“It’s reassuring to know that the housing market has more life to it,” says Gary Naim, Petros  Homes president. “With interest rates low and a healthy job market, it remains a great time to buy a new home.”

Zelman has a unique perspective of the housing industry in northeast Ohio. For the past two decades, she has built a national reputation for her insights and research on the status of the country’s housing industry. In addition, the resident of Moreland Hills has a direct view of, and can compare, the Greater Cleveland housing market to the nation’s.

“The Pulte Group has attended several of Ivy’s presentations in the past. The information that was presented this year helped reinforce our national strategy, as well as our localized business focus,” says Cleveland Division President Paul Spenthoff of Pulte Group.

That includes the influence of demographics. About 82 percent of 30 to 39 year olds in households living in single family homes are married with two children. Children drive single-family home living, according to Zelman. About four percent of homes are now built as rental properties, says Zelman. But she believes that number could easily be 10 percent.

“Homeownership rates are accelerating,” says Zelman, who expects “entry-level homebuilding orders to expand by more than 15 percent” in 2020.  She also states that 25 to 39 year olds are driving homeownership and that the birthrate (more kids, more demand for houses) is up 1.8 percent. “Millennials and baby boomers want brand new, smart homes and open floor plans.” And often back yards for kids and dogs. New single family rentals may be part of the answer. 

That desire for “new” has its challenges. The average age of housing stock in the United States is 43 years and in Cleveland, it’s even older. Nationally, 60 percent of housing is older than 20 years. The home-buying millennials are “do-it-for-me, not DIYers,” says Zelman and they want to buy move-in ready homes. Again, that indicates that newly constructed rental homes have a huge potential for millennials and others not quite ready to buy their first house.

Zelman also warned about multi-family housing in downtown Cleveland becoming overbuilt, as younger families with kids move to the suburbs. The exurbs (farther out than suburbs from a core city) post the greatest population growth. In 2016 builders who once again dipped their toes into the outer communities after the housing recession of 2008 were at first hesitant, according to Zelman.

“Now they can’t build houses fast enough,” says Zelman.

The current housing shortage, particularly affordable single-family homes, is also taking a toll on home buyers. Currently, new home construction nationally is 25 percent lower than what is needed, according to Zelman. Increasing labor costs, restrictive government regulations, lack of available, buildable land and a shortage of skilled trades hamper builders in many areas.

“We are at a 30-year low of inventory of new and existing homes in the United States,” says Zelman. (Boomers are staying in their homes longer, are refinancing, and in some cases, becoming landlords --all factors contributing to fewer homes on the market. Younger generations are often restricted from buying because of student loan debt (but only if they don’t graduate or obtain a degree, says Zelman) and healthcare costs.

In Cleveland, the inventory of homes for sale includes only a 2.8-month supply, a figure Zelman calls “tight.” If you are selling a house for around $300,000, you will have multiple offers, she predicts.

“But that should allow builders to feel confident. I am especially bullish on builders who shifted to building affordable homes,” says Zelman, who considers an entry level home in Greater Cleveland to cost about $130,000 and luxury homes starting at $650,000.  She defines “affordability” as not spending more than 30 percent of your income on shelter. (Fifty percent of renters are considered “burdened” by their housing costs, according to Zelman.)   

Affordability is a consideration for JEMM Construction. Partner Mark Maltry, Jr. said his company “will shift home design and pricing to meet affordability needs.”

“Single-family home starts and remodeling will be strong for the next two years. Multi-family is a saturated market, and if you have plans for multi-family (building), tread cautiously,” says Maltry.

HBA President Dean Tompkins, vice president of Payne & Payne Renovations and Design believes that “it feels like (home) prices have been climbing, but when you take into account the value of money with interest rates right now it is a great time to build or remodel.”  

Zelman also acknowledges many buyers want a place for their parents – houses with wings and in-law suites. With the shortage of affordable homes, more generations in the United States will live together, she says. In 1980, 12 percent of homes were multigenerational. In 2018 that percentage rose to 20 percent.

Another of Zelman’s “bold statements for 2020” includes the idea that the non- QM (qualifying mortgage) market will increase more than 50 percent. Eligibility for these loan products rely on alternative evaluations and analysis not used for standard mortgage seekers. Candidates can include the self-employed, prime borrowers, those with significant assets and foreign borrowers.  The granting of legitimate non-QM products will help increase home sales.    

“Recession” is the word whispered in the room whenever economists and housing experts gather.  Zelman agreed with many other experts that a recession could occur in the next 12 months. But housing and mortgage failures would not be the direct cause of the situation or hardest hit, many say. Zelman was wary, but not at all panicked. She believes if a recession did happen, single family units purchased would decline by 3 to 5 percent and home improvement spending would drop 1.5 to 2 percent. But Cleveland’s less volatile housing and construction industry may be less affected than many other areas of the country.  

“If a recession were to hit, home building would not be hit nearly as hard as the previous recession. There might be a decline, but not as long or as severe. There is just too much pent up demand. When you look at the number of households formed versus housing brought to market there is a significant gap. This should mitigate any downturns,” says Tompkins.

 

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