Speculation surrounding the housing market has been buzzing, and many are wondering what the state of the economy will be like tomorrow, in a month, and even one year from today. With the rapidly changing environment, it’s difficult to decipher what is next for housing.
Ted C. Jones is the Chief Economist and SVP for Stewart Title Guaranty Company, where he addresses the information needs of internal and external customers, conducts ongoing research and supports economic and financial analysis for the company and its customers. Previously, he served as the first director of investor relations for Stewart (NYSE-STC) for 17 years. Jones earned a PhD in finance with a minor in statistics and a master’s degree in land economics and real estate from Texas A&M University. He holds a Bachelor of Science degree from Colorado State University.
Jones sat down with MReport to discuss economic trends, rising interest rates, and how the construction of new homes is weighing on supply and home prices.
Q: What are some trends that you are currently seeing with home sales on a larger, national level and do you expect those trends to continue throughout the year?
A: The nation experienced a slow market from mid-2016 to the end of 2016. However, the market saw the most home sales since 2006. Considering the election and a few other components, people were stepping back from the high-end marketplace. Another trend we’ve seen is rising rent costs. In almost every city in America, rent prices are increasing. Whether you own or are preparing to buy, prices are steadily increasing. Now enter entry-level home buyers, who are slowly making their way back into the market. We’re not going to see a huge increase in homeownership, but there is room to grow. For the first time ever, millennials became the largest, single, home buying segment demographic in the country. The other thing we are seeing is rising interest rates. Freddie Mac’s most recent release cited the 30-year fixed rate average at 4.19 percent, and loan applications have dropped 18 percent. I do not expect much of a slow-down whatsoever from rising interest rates. I anticipate the interest rate to be between 4.7 and 5.3 percent in the next 12 to 18 months.
Q: Do you expect more interest rates to rise throughout the year?
A: I do. I did anticipate that the Fed would not increase interest rates on February 1, but I do expect them to have three rate rises this year. There’s lots of inflation that we just aren't measuring accurately. You can't have those kinds of price increases and not result in inflation. We’re also seeing that even the Fed’s definition of full employment has been reached – that is the unemployment rate hovering between 5 percent and 5.5 percent.
Q: How has the amount of home building construction in the U.S. affected home prices and the supply of homes?
A: Builders have three major headwinds right now. First, we have run out of lots. Since 2008, we have hardly built any and we're back trying to quickly catch up. It’s very difficult to build lots in some states. For example, in California, it can take up to 12 years from the planning stage to the end result until you actually complete your first home on new residential development in a subdivision. Houston is the largest city in America with no planning or zoning, so we can actually do it a lot quicker than that.
The second obstacle is that construction workers left the work force during the implosion of the housing bubble. We have really been constricted by a shortage of skilled laborers. A study released last year cited that 15 percent of construction workers were undocumented illegal aliens. In an already constricted space where we already don't have enough workers, a shortage of labor will actually slow down your growth. The last obstacle is massively increased construction and materials costs. In a globally competitive market, our materials are globally priced, not locally priced. It has been difficult to ramp up with those three obstacles, but our builders have done a great job. We’re more constrained on the finance side.
Q: What are some of the challenges that an economist faces when trying to anticipate the future health of the real estate market?
A: The health of the real estate market is a pure function of one thing—job growth. If you want to see where real estate is going, you have to look at job growth. In the last 24 months, the U.S. economy has seen slow growth. Whoever became president was bound to take over in a shrinking job growth market. About two years ago, the nation was producing over three million jobs every year, but got down to 2.1 million on a rolling annual basis in the last few months. With the right guidance, we can easily get back on pace this year to produce three million jobs.