Investors, Executives Debate Housing Uncertainty at 11th Annual Housing Summit

Last week in Boston, Zelman & Associates hosted its 11th Annual Housing Summit, welcoming over 600 institutional investors and industry executives. Over the course of two days, the most important aspects of the housing outlook were detailed in our opening presentation and highly-informative panel discussions with industry leaders across the housing spectrum, including apartment operators, building products manufacturers, homebuilders, mortgage originators, real estate brokers and single-family rental owners.

From our perspective, investors’ tone at the conference was as downbeat as we can recall since the cycle began, including the taper tantrum. While industry executives largely acknowledged that buyer activity has slowed of late and affordability concerns are creeping into the discussion on the heels of rising home prices and higher mortgage rates, there remained broad-based optimism that fundamentals can reaccelerate and above-average growth is still likely over the next several years.

For homebuilders, we expect market conditions to remain choppy through year end and anticipate that a greater need for incentives could pressure 2019 profit margins when those homes are delivered. With that said, unit growth should reaccelerate next year as demand laps the slower current activity, new communities come online and buyers inevitably adjust to the new rate environment as they have in almost all prior instances of large rate moves. We expect builders at more affordable price points to be best positioned.

Real estate brokerage CEOs were optimistic that unit growth should reemerge as inventory slowly returns. However, the market is likely to shift toward a healthier environment compared to the robust sellers’ market of years past when unit growth was mitigated by supply and price acceleration became the norm. It is clear that innovation is a focus for established and new market entrants as the traditional brokerage model is being forced to evolve.

All building products manufacturers are combating higher costs from raw materials, transportation and employee wages. Although these headwinds are significant and could be challenged further by tariffs, executives were confident in their ability to offset the pressure through price increases and internal initiatives. Juxtaposed against softer front-end demand from homebuilders, the home improvement environment remains strong, according to conference participants.

For the mortgage market, executives described one of the most competitive environments in recent memory as shrinking refinance opportunities and excess industry capacity pressure margins. In general, borrowers are the clear beneficiaries of this competition and expanding credit tolerances.

Lastly, for rental housing, single-family operators described a stronger growth environment than multi-family peers, especially those with urban exposure. While homeownership rates are rising, tenant turnover has been steady and single-family rent growth has remained strong at nearly 4%. Multi-family operators are more challenged by new supply as well as rising costs, and therefore offered a more sanguine outlook for 2019. Nevertheless, modest growth is expected given overall tight housing inventory.

In our opening presentation, we argued that the definition of “the cycle” is itself up for debate, but our deep research, proprietary surveys and conversations with industry veterans still suggest that the positives easily outweigh the negatives. We’d characterize the current softer growth environment as a “mini-cycle” embedded within a broader uptrend in housing.