A lack of new construction is impeding economic growth nationwide, and San Diego County is expected to add only 2,500 single-family homes in 2014, two economists said Thursday.
As the U.S. economy strengthens, demand is increasing for multifamily units — which will account for most permits in 2014 — as millennials are delaying homeownership, but are moving out of their family members’ homes and into apartments.
Mark Fleming, chief economist at CoreLogic, and Alan Gin, associate professor of economics at the University of San Diego, discussed the national economy and housing market at the Burnham-Moores Center for Real Estate at USD’s Mid-Year Economic and Financial Update. Alan Nevin, director of economic and market research at Xpera Group, moderated the event.
Housing’s percentage of the nation’s gross domestic product is down slightly at 18 percent, compared to its average of 20 percent, Fleming said. New-home sales generate more economic activity than existing-home sales, and a lack of construction is the biggest reason why housing isn’t reaching its normal level, he said.
New home starts are “very, very depressed,” Fleming said. Gin said the number of permitted units in San Diego County hit a low in 2009 at fewer than 3,000. There were about 8,000 residential units authorized last year, and there will be slightly fewer this year, Gin said. That number is less than half of the number of units in the early 2000s, which in turn was down from the 1980s.
Single-family homes are up 10 percent from last year, but coming off a low level, Gin said. The county is expected to add about 2,500 single family homes in the county, compared to almost 10,000 in the early '00s.
There has been a large expansion of multifamily construction in recent years, which is now the majority of permitting activity, Gin said. The strong demand comes in part from high unemployment, which caused people to move in with family members. With the economy expanding, Gin said, those people are now able to move out and into apartments.
The millennial generation is choosing to rent instead of buy in part because the group has also been delaying getting married and having kids, Fleming said. He said the nation may have to wait for millennials to turn 35 before they buy a home, compared to their parents, who were more likely to have bought at 28.
Student loan debt has been referred to as an impediment to homeownership, but Fleming referenced a study that shows the relative burden on income is the same as it was in the early 1990s. About 10 percent of a person’s income goes toward serving student loan debt for those who finish their degree — the same as it was in the 1990s, he said.
The caveat is that those with student loan debt must graduate to see the benefit of the investment in their education, Fleming said.
Student loan debt is rising and incomes are broadly flat, Fleming said, but those who completed a degree will see income returns. Loan repayment terms are also better than they were in the ’90s, extending the ability to pay and keep the burden down, Fleming said.
Home prices are increasing nationwide, but Fleming said it’s unlikely that a bubble is brewing. There’s been a big increase in prices nationwide driven by little supply compared to demand, but prices are rising from a low base, he said.
Home prices are still slightly undervalued nationwide as they appreciate from an overcorrection at the bottom, Fleming said.
Gin said he expects San Diego’s home prices to increase 10 to 15 percent in 2014.
Cash sales make up about 35 percent of total sales nationwide, which is elevated from a 25 percent average but coming down slowly, Fleming said. Institutional investors played a “small but important” role during the Great Recession, as they bought houses in markets where people couldn’t get a loan and the housing market was in free fall, Fleming said.
It took institutional investors about a year-and-a-half to accumulate about 300,000 homes, compared to 5 million homes sold nationally, Fleming said.
“They put a floor underneath things. It would have been a lot worse without them,” Fleming said.
There’s been a downward trend nationwide in the number of distressed houses available for sale, Fleming said. Sales of resale homes that are not in distress are flat-lining as existing homeowners take longer to move.
The vast majority of mortgages outstanding today are “out of the money,” Fleming said, meaning there’s no incentive to refinance. Only 24 percent of outstanding mortgages have rates above 5.5 percent and Freddie Mac’s monthly average commitment rate for June was 4.16 percent.
The reduction in refinances has brought the mortgage market down to about $1 trillion, Fleming said, when there were about $3 trillion worth of mortgages in 2003.
The average number of years between moving has been about seven, which is expected to increase as interest rates trend upward, Fleming said. Gin forecast interest rates to increase 50 basis points (0.5) by the end of the year, adding they will still remain at a historically low level.
Gin said San Diego County’s economy is doing “great.” About 66,000 jobs were lost in 2009, but San Diego has bounced back, adding more than 30,000 jobs in the last two years and on track to add close to that or exceed that number in 2014, Gin said.
Job growth locally is occurring mostly in professional and technical services, such as lawyers, architects, engineers and the research and development sector, Gin said. That sector has added more than 6,000 jobs in the first six months of 2014, compared to the same time period in 2013. Leisure and hospitality has gained 5,000 jobs, compared to 2013.
Gin forecast San Diego’s unemployment rate to hit the low 5 percent range by the end of 2014 – it is now at about 5.8 percent. That number is good, Gin said, but there’s still a long way to go – the unemployment rate was below 4 percent when San Diego was booming.
The San Diego economy is expected to outpace the national economy, Gin said. The nationwide unemployment rate is about 6.1 percent, and Gin forecast it to hit 6 percent by the end of 2014.
As the labor market improves, more people will come back into the job market and keep the unemployment rate from falling faster, Gin said. About 8.8 million jobs were lost during the Great Recession, and about 9.1 million jobs have been gained in the past 52 months as the population increases, Gin said.
The labor force participation rate peaked at 67 percent in the late ‘90s and is now down to 63 percent, Gin said, which can be partly attributed to baby boomers retiring.
Nationwide, while 6.1 percent of people are officially unemployed, that number jumps to 12.1 percent when taking into account discouraged workers, marginally attached workers, and those working part time for economic reasons, Gin said.
Businesses streamlined operations during the Great Recession, squeezing more productivity out of fewer workers and using more part-time or temporary workers, Gin said. He added that it’s unlikely businesses will hire back the full number of people laid off.
This has disrupted what Gin called the “virtuous cycle.” Typically in a recovery, increased employment leads to increased income, which leads to increased consumer spending, which then leads to investment and hiring — and the cycle continues.
Streamlined businesses meant fewer employees, which caused a decline in consumption.
Gin forecasts the nation’s GDP growth to be about 3 percent in 2014, despite the first quarter’s decline. The nation has historically averaged a 3.5 percent growth, and has average about 2 percent during the recovery, Gin said. The decline is due mostly to decreasing consumption and government expenditures, he said.
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