About


Real Estate Research provides analysis of topical research and current issues in the fields of housing and real estate economics. Authors for the blog include the Atlanta Fed's Kristopher Gerardi, Carl Hudson, and analysts, as well as the Boston Fed's Christopher Foote and Paul Willen.


January 24, 2018


Housing Headwinds

In a recent post, we described the outlook for housing growth in the Atlanta Fed's district as "slow and steady." In this post, we look at what other Fed districts are hearing about housing growth and attempt to reconcile those anecdotes with recent signs from the Atlanta Fed's GDPNow.

The most recent Beige Book characterized residential real estate activity as "constrained across the country." Of the 12 districts, only one (the Federal Reserve Bank of Chicago) raised its classification of the pace of residential construction, and five lowered their assessments. The other districts remained at little or no change, including San Francisco, whose pace was still strong despite shortages of land and labor. Indeed, several districts cited tight labor conditions as limiting new construction.

With labor and, to a certain extent, land market conditions holding back construction, we might expect the prospects for residential fixed investment (RFI) in the fourth quarter of 2017 to be dreary. However, recent releases of GDPNow indicate that residential fixed investment should make a relatively strong contribution to fourth-quarter real GDP growth after being a drag in the second and third quarters (see chart).

Interestingly, brokers' commissions are making the largest contribution to RFI, followed by permanent site (single and multifamily construction) and improvements. The increase in brokers' commissions reflects the increase in the real value of home sales that resulted from the acceleration of house prices as well as from a sharp increase in the number of existing and new home sales reported for October and November 2017 (see chart).

An increase in both house prices and the number of houses sold is consistent with strength in housing demand. We look to the supply of housing to understand the Beige Book's description of constrained real estate activity. Housing inventory provides an indication of supply conditions. Eleven Fed districts reported that residential inventory conditions were tight (the remaining district did not mention inventory). Several stated specifically that low inventory was restraining sales and that the low number of available houses is putting upward pressure on house prices.

Constrained residential real estate and construction activity does not mean that the sector is doing poorly. It just means that, the housing market's positive contribution to economic activity could be greater if land and labor market conditions were more favorable.

The national Beige Book comments are consistent with our view of housing sector conditions in the Southeast—specifically, that supply-chain constraints imply that near-term residential investment growth will be steady and measured.

Photo of Carl Hudson Carl Hudson, director of the Center for Real Estate Analytics


January 24, 2018 in Housing demand , Housing prices | Permalink | Comments ( 0)

January 03, 2018


Where Is the Housing Sector Headed?

One element that has distinguished the expansion following the Great Recession from expansions following prior recessions is the slow recovery of the housing sector. Recent data releases relating to home sales activity and new construction point to a housing market that continues to grow at a slow but steady pace. Single-family starts are increasing but remain low by historical norms. According to the U.S. Census Bureau, the 12-month moving average of multifamily starts has peaked after increasing steadily over the last several years. The data releases since the initial fourth-quarter GDPNow nowcast  on October 30 have, on net, brightened the outlook for residential investment.

These numbers tell us where we are but not what lies ahead.

To supplement official data releases, the Atlanta Fed collects anecdotal information from market participants. This information helps us detect shifts in trends and concerns that may influence the future direction of housing. Results from our recent industry forums and surveys indicate that (1) we should expect more of the same slow, steady growth, and (2) there are downside risks to the outlook.

On December 1, in conjunction with the Georgia State University Department of Real Estate, the Atlanta Fed held a Real Estate Industry Forum to discuss current trends and challenges facing the real estate industry. The good news from the panel of chief economists was that demographics—especially with millennials entering the age of household formation and house purchasing—and other underlying fundamentals, such as employment growth and tight inventory, continue to support an optimistic outlook for housing demand. The supply of housing is where most of the concerns sit.

The industry forum panelists noted that some geographies face supply constraints that will hinder the delivery of housing sufficient to match increased fundamental demand. Such observations are consistent with responses we received in our November 2017 Construction and Real Estate Survey. In the poll, most builders reported labor cost increases from the year-ago level; nearly two-thirds of respondents said labor costs had increased more than 3 percent. All builders said material costs had increased over the same period. Many continued to note that the amount of available credit for construction and development remained insufficient to meet demand. Builders said they expect construction activity over the next three months to be flat to down.

When asked if they would be able to meet a sudden spike in demand for homes, Southeast builders' responses were split: 46 percent said they would not be able to handle the spike in the demand, while 38 percent said they would. Most builders indicated they faced challenges with hiring and that it was affecting their ability to grow their businesses. Of those experiencing difficulty hiring, more than half attributed it to the homebuilding industry—that is, too much demand for construction laborers or too few workers. One-fifth attributed the labor shortage to workers lacking the necessary skills set. The responses to open-ended, follow-up questions reiterated these findings; respondents cited lack of skills and poor work ethic as the top challenges to finding quality workers.

One interpretation of builders' inability to grow their business or respond to a spike in demand is that the market is near equilibrium. That is, production is at a point such that increasing the scale of operations is not profitable, and scaling back production does not improve profitability either. Improving the supply of labor can be done, but will take time in terms of training and skill acquisition. The timing and extent to which the access to financing can be improved is less known. While underlying fundamentals support an optimistic outlook for the housing sector, supply chain constraints imply only measured near-term residential investment growth.

Photo of Jessica Dill By Jessica Dill, economic policy analyst in the Research Department and

Photo of Carl Hudson Carl Hudson, director of the Center for Real Estate Analytics


January 3, 2018 in Housing demand | Permalink | Comments ( 0)

September 29, 2017


Did Harvey Influence the Housing Market?

The August housing and construction data are starting to trickle in. So far, the data tell us that residential investment could be a drag on third-quarter gross domestic product growth. They also tell us that U.S. existing home sales were down slightly (-1.65 percent) from the month-earlier level but flat to slightly up (0.19 percent) from the year-ago level. Housing starts tell a similar story: total starts were down slightly (-0.84 percent) from one month earlier but up slightly (1.37 percent) from one year earlier. Year over year, new residential sales were down 1.2 percent.

The Atlanta Fed conducts a monthly survey of residential brokers and homebuilders in the Southeast to detect emerging real estate trends before the release of official statistics. In the most recent Construction and Real Estate Survey, many builders said they expect home sales to be flat over the next three months relative to the same period last year, while most brokers continued to anticipate slightly higher sales. A large share of builders expect construction activity over the next three months to hold steady or increase slightly.

The survey included a handful of special questions to give better insight into current market conditions and pressure points. The first question asked whether Hurricane Harvey had an impact (directly or indirectly) on their business. Most respondents said that Harvey did not.

Chart-one

Those who said they experienced some effects from Harvey (35 percent of homebuilders and 24 percent of residential brokers) were asked to provide more details. Some respondents said they have seen upward pressure on fuel costs, extended lead time on deliveries, and additional pressure on already tight labor markets. Several respondents cautioned, however, that it was too soon to assess the full extent of the impact.

We should note that Hurricane Irma passed directly through the region toward the end of the polling period. As a result, disentangling which storm the comments referred to was sometimes difficult. We will follow up on the impact of Irma in next month's poll. We hope that affected builders and brokers will be able to respond.

In the second set of special questions, we asked residential brokers and homebuilders to look ahead over the next 12 months and rank risks to their housing market outlook. Declining affordability emerged as the top risk facing the housing market, followed by supply-chain constraints and lack of for-sale inventory.

Looking ahead over the next 12 months, please rank order the following risks to your housing market.
Average Rank Order Score
Builder Rank Order Score
Broker Rank Order Score
Declining affordability
57 56 57
Supply chain constraints
51 64 38
Lack of available for-sale inventory
41 28 54
Waning consumer confidence
35 32 38
Other
21 27 15
Credit availability challenges
11 17 6

Note: Respondents were asked to rank order the factors. A rank of one scored 7 points, two scored 5 points, three scored 3 points, and four scored 1 point. No scores were assigned to ranks greater than 4.

Separating broker and builder responses shifts the top risks a bit. Considering broker-only responses, the top risks were declining affordability and lack of for-sale inventory. For the builder-only responses, the top risks were supply-chain constraints and declining affordability.

Anticipating that supply-chain constraints would, in fact, be one of the top risks to builders' housing market outlook, we also asked builders to complete the same exercise with supply-chain constraints. Builders said rising costs (of vacant developed lots, or VDLs, materials, and land) along with labor shortages topped the list of supply-chain constraints.

Looking ahead over the next 12 months, please rank order the following risks to your housing market.
Rank Order Score
Rising cost of vacant developed lots (VDLs)
43
Upward pressure on material costs
30
Labor shortages
23
Rising cost of land
22
Other
21
Dwindling lot inventories
19
Costly land titling process
17
Upward pressure on labor costs
14
Construction financing challenges
11
Burdensome/costly local ordinances
11
A&D financing challenges
7
Burdensome/costly federal regulations
3
Burdensome/costly state regulations
3

Note: Respondents were asked to rank order the factors. A rank of one scored 7 points, two scored 5 points, three scored 3 points, and four scored 1 point. No scores were assigned to ranks greater than 4.

The responses to these special questions confirm some of the anecdotes we've heard through other channels—that is, builders are worried about declining affordability and tight inventory levels. Also, importantly, supply-chain constraints remain a barrier to any acceleration in bringing new inventory to market. Interestingly, ADC (or acquisition, development, and construction) credit challenges appear to be less pressing now than in years past, while concerns about construction costs appear to have become more elevated. Views on labor shortages remain unchanged—they have been and continue to be a top concern.

We conducted this poll September 5–13, 2017. It reflects the views of 17 homebuilders and 18 residential brokers across the Southeast. View the Southeast Construction and Real Estate Survey results in more detail on the Atlanta Fed website.

Photo of Jessica Dill By Jessica Dill, economic policy analyst in the Research Department and


Photo of Carl Hudson Carl Hudson, director of the Center for Real Estate Analytics


September 29, 2017 in Housing demand , Housing prices | Permalink | Comments ( 0)

April 14, 2017


Is the Share of Real Estate Sales to Investors Increasing?

In early February, our monthly Construction and Real Estate Survey came back with a few comments that called attention to increasing investor home buying activity in certain Southeast markets.

Central Alabama: "We are as busy in early February as we usually are in May! I heard today that a busload of investors came to town recently because they'd been told [we have] a great cash flow market. Haven't heard that kind of talk since 2005."
Metro Atlanta: "I checked on the percent of homes we sell to investors. The answer is 19% so far this year. That is the highest level since the recession. Actually, that is a little scary because with rate increases and a fall in investor confidence, this section of the market will go away overnight. Before the last recession when we were in the bubble, investors were making up about 50% of the market in some lower-price neighborhoods. Keep an eye on sales to investors; anything over 10% is a little scary to me."

Given that we did not solicit comments on this specific topic, we wondered what these comments may signal. Was investor activity increasing in isolated markets, or was this increase more widespread? We decided to dig a bit deeper in our March poll, using special questions to gather more information on the trend in investor activity. We also turned to other data sources for additional clues. In short, what we found is that, while there may have been an increase in investment activity in some Southeast markets, investor activity does not appear to have increased in a material way at a national level.

In our March 2017 poll, we asked residential brokers and homebuilders to indicate whether home sales to investors had increased, remained unchanged, or decreased over the course of the previous year. While some respondents did see an increase in investor buying in their markets, the majority of builders indicated no change. Broker responses came in mixed. Interestingly, more brokers than builders indicated that investor activity was down.

Chart-01-of-03-home-sales-to-investors

To get a more complete picture, we also asked our business contacts to describe the distribution of home buyers in their market in the previous month (that is, the shares of sales to first-time buyers, repeat/move-up buyers, and investor buyers). On average, respondents indicated that 13.9 percent of home sales in February 2017 across the Southeast were to investors. Because we asked this question in the past, we were able to compare the response to previous periods. Interestingly, the investor share has trended downward since we started asking this question in 2012, and registered its lowest reading to date.

Chart-02-of-03-southeast-composition-of-homebuyers

Out of curiosity, we wondered how our results compared with those from the National Association of Realtors (NAR), which asks a similar question about the share of sales to investors in its monthly survey, the Realtors® Confidence Index. The main difference between our survey and the NAR's survey is that our respondents are limited to the Atlanta Fed's Sixth District while the NAR's respondents are spread across the nation. After plotting our Southeast results on the same axis as the national NAR time series (see below), we found that both series appeared to trend downward over time.

Chart-03-of-03-investor-share-of-home-sales

Observing a similar trend in both series provided some assurance that investor activity has not ramped up to the extent that it had prior to the housing downturn. However, it is difficult to say what influence (if any) the results of the ongoing NAR survey had on our panel's responses. To get a third perspective, we turned to the Campbell/Inside Housing Mortgage Finance HousingPulse Tracking survey, a proprietary national-level monthly survey that ran from July 2009 through November 2016. The Campbell survey asked a similar question. This survey also shows a downward shift in the trend in the investor share of all home sales.

While these three separate surveys point to a broadly similar trend of declining investor share of sales, we felt it was important to consider other measures for tracking investor activity. Another potential proxy measure could be the share of flipped properties to home sales. CoreLogic's Insights Blog recently featured a couple of posts (here and here) that highlighted the current state of flipping. The author of the posts, Bin He, defined a flipped property as a property that was bought and sold within a 12-month period. He found "the ratio of flips to sales stands at 4.9 percent in 2016, which is well below the peak value of 7.5 percent reached in 2005." While a property flipper is just one type of investor, this analysis serves as one more piece of evidence that pushes back against the idea that investor activity has picked up in a material way.

To conclude, certain areas around the Southeast may have seen an increase, but investment activity does not appear to have increased in a material way across the nation. Although the measures we refer to above do not necessarily provide an apples-to-apples comparison, they independently but collectively provide some reassurance that investor activity has not returned to where it was at the height of the bubble (which of course is hard to pinpoint exactly because few of these more robust measures date back that far). The hope, of course, is that one or more of these measures would provide some type of signal if investment activity were heading in that direction again.

Photo of Jessica Dill By Jessica Dill, economic policy analyst specialist in the Research Department

April 14, 2017 | Permalink | Comments ( 0)