A Long-Term Housing Trend Trifecta

Moving toward the end of this year, many entities are starting to offering their glimpse into what is to come for the 2017 housing market. With recent clarity brought by election results and a new administration set to begin come January, many in the industry wonder what shifts will take place among various metrics in the market. According to Freddie Mac’s November Insight, the metrics to watch are not coming out of left field but have already been slowly working in the market.

"These three long-standing trends—ones that have been building quietly over decades—ultimately will have more influence on housing than the week-to-week oscillations of mortgage rates or any of a host of other short-term indicators of housing activity,” said Freddie Mac Chief Economist Sean Becketti. “These three trends affect housing and mortgage markets through their influence on both the demand for and the supply of housing. The change in income distribution shifts the demand for housing—both the total demand for homeownership and the demand for different types of housing. The rising share of land costs shifts the supply of housing—houses cost more than before because of the higher cost of the land component of the house. And land use restrictions limit the supply of more-affordable housing in richer states. No analysis of the future housing market is complete without considering them."

Freddie Mac reports that the most important trend is increasing income inequality between the “relative fortunes of low-, middle-, and high-skilled workers.”

The analysis says that demand has increased for high-skilled/waged jobs as well as low-skilled/waged jobs. Trulia Chief Economist Ralph McLaughlin shared the same sentiment in a recent report saying metros with the lowest incomes had the highest income growth last year, a clear sign, he said, that regional income convergence is picking up.

McLaughlin’s report also said that in low-income markets in general, income growth rose about 5.5 percent as median prices rose 3 percent. This dynamic was shared with the highest income areas, where income grew 3.5 percent and median prices grew 3 percent in 2015.

In addition to these findings, the recent Employment Summary from the Bureau of Labor Statistics showed a 10-cent rise from the month prior, welcome news as a large hinder to homeownership has been wage growth falling behind home price appreciation.

However, Freddie Mac’s Insight does not spell relief for middle-skill job demand as it does for low and high-skill.

“Demand for middle-skill jobs has decreased contributing to a ‘hollowing-out’ of the middle class,” says the report. “Technology has eliminated white-collar clerical, blue-collar production and craft, and related jobs.”

The second trend Freddie Mac listed that could shape the housing market was the rising share of the cost of land in house prices. The share of land costs has risen much faster than real construction costs and are much higher than even 20 years ago, according to Freddie Mac. In some markets, like San Francisco, almost all the buildable land has been developed and the only way to build a new house is to tear down an existing one, which does not increase the inventory. In other markets, there is an abundance of buildable land to be developed, but it is distant from the center of the city with fewer amenities. The result is a higher cost to commute and to find those amenities, such as health care or shopping. The increasing scarcity of land in prime building locations has resulted in higher building costs, Becketti said.

The third trend is the increasing use of land restrictions, according to Freddie Mac. Becketti noted a recent paper from Peter Ganong and Daniel Shoag which stated that the income gap between rich states and poor states narrowed for a century because per capita income grew faster in poorer states than in richer states. This was driven by migration; workers in poorer states moved to richer states, which resulted in both increased wage growth in poorer states and restricted wage growth in richer states.

"Over the past three decades, however, the rate of convergence has slowed. Ganong and Shoag provide evidence that increasingly-strict land use regulations in the richer states are responsible for this slowdown. Regulation has boosted housing costs in richer states, making migration more difficult for low-skilled workers, while leaving it still attractive to high-skilled workers who can earn enough to defray the higher housing costs," Becketti said. "The authors estimate the increase in hourly wage inequality from 1980 to 2010 would have been 10 percent smaller if the convergence in state income per capita had maintained its earlier, more rapid pace."

These three trends could affect the homeownership rate, housing inequality, creation of wealth through homeownership, house price volatility, and shifts among shares in the mortgage market for FHA and VA loans, the private sector, and the GSEs in the long term, according to Freddie Mac.

To read the full Freddie Mac November 2016 Insight, click HERE.