Trends & Observations:
Residential Market Rising Tide: Exploring Housing Demand in High Growth Markets
Figure 1: 30-Year Fixed Rate Mortgage
As the bulk of the Millennial generation begins to enter the 35-44 age bracket (key homebuyer age), housing demand for entry-level homes will continue to be strong, as new households are formed by this cohort made up of over 70mm people.1 While this demand driver has been present for some time, we believe we’re seeing an acceleration of homebuying among this generation due to the pandemic driving them out of urban centers to a more suburban lifestyle. The demand has been so strong that some homebuilders started withholding inventory in the second half of 2020 to ensure they had enough to sell in 2021; many homebuilders are facing a dearth of finished lot inventory relative to demand heading into 2021. Given this, we would expect homebuilders to have healthy profit margins in 2021 – assuming costs don’t increase at the same rate as home prices. Due to the supply-constrained housing market, coupled with record-low mortgage rates, the U.S. saw material home price appreciation (“HPA”) in the 12 months ended November 2020; according to the Burns Home Value Index,2 HPA is up 11% year-over-year and isn’t showing any signs of slowing down.
The demand void in the multifamily space left behind by Millennial homebuyers is projected to be absorbed by Gen Z as they are expected to behave similarly to Millennials in regard to anticipated household formation happening later in life and less financial priority on an initial home purchase. While the Millennial population is currently the largest, Gen Z is close behind with approximately 68mm people,1 propelling sufficient demand in the for-rent space. With the current single-family supply constraints and accelerated HPA, we expect the trend of longer-term renters to continue through this generational transition. Short-term impacts of the pandemic have driven demand and rent growth in lower-cost Sunbelt cities, which may continue depending on the long-term adaptation of remote work environments. Although there are some mitigating factors muting some of the affordability issues – such as HUD recently announcing material increases to FHA limits in December and the Biden administration proposing up to a $15k first-time homebuyer credit at the time of closing – the current housing market conditions likely make a home purchase unachievable in the near term for some hopeful first-time homebuyers. While it is expected that the new administration will continue to pass record stimulus packages in 2021, the quantum of stimulus contemplated will likely help keep people in their current living situation versus helping them buy a home.
Figure 2: Population by Age Cohort
Looking at the well documented migratory trend of people moving out of high-cost of living states such as California and New York to many of the Sunbelt states, we took a deeper dive into four markets (Phoenix, Salt Lake City, Houston and Tampa Bay) across the country that have been the beneficiaries of this migration. As jobs are created across the Sunbelt from companies establishing a larger presence, both residential and multifamily will see the benefits from the stratification of the jobs that are being created and/or relocated.
Figure 3: Phoenix 2020 Technology Job Announcements
Figure 4: Affordability Index: Phoenix vs. Top Net Migration Counties
Figure 5: Phoenix vs. National Year-Over-Year Home Price Growth
Figure 6: Phoenix vs. National Year-Over-Year Rent Growth
From a multifamily perspective, after a significant 9% drop in 2009, rent growth experienced over ten straight years of positive increases. This growth can also be attributed to demand (household growth) outpacing supply (new construction starts) beginning in 2010; however, the impact on rents is delayed compared to the immediate sharp increases in single-family home values, as Phoenix didn’t begin outpacing the national average until 2014 and 2015.4
An increase in high-wage jobs and a growing population has led to gentrification trends throughout Phoenix and created a surge in demand for affordable housing markets to support the workforce in the outskirts of the city. Over the past 10 years, the areas with the highest rent growth were the outlying suburban submarkets to the North (Deer Valley), West (Glendale, Peoria) and East (Mesa/East Valley), each of which achieved cumulative rent growth of 65% or greater since 2011 according to CoStar. For comparison, more established submarkets such as Downtown Phoenix and Scottsdale achieved cumulative rent growth of 34% and 41%, respectively, during the same time period.5
Although growth trends appear to be slowing, Phoenix has continued to demonstrate a healthy demand for single-family and multifamily housing throughout the COVID-19 pandemic in 2020 when compared to the national average. Single-family and multifamily starts finally outpaced forecasted household growth in 2020, leading to more tempered rent and home price growth. The increasing supply could be beneficial for Phoenix as the area comes closer to a market equilibrium and will lay the foundation for a comparatively affordable housing market over the next five years as the job market continues to diversify. If migration trends persist, driven by coastal residents flocking to an affordable alternative, the market could exceed projected growth – further straining supply levels, leading to continued price appreciation and rent growth.
Figure 7: Household Growth vs. Supply
Figure 8: GDP Growth Outlook, 2020-24
Figure 9: Salt Lake City Home Price Values
Figure 10: Houston GDP Growth
Prior to the pandemic, Houston’s multifamily saw annual rent growth averaging 1.9% from 2009-2019 compared to the U.S. national average of 2.8%. This underperformance was partially due to a soft 2016 in which rents decreased 2.4% across the region while rents across the U.S. increased 3.1%; however, in August 2017, the market saw a 1.7% jump in rental rates the first month following Hurricane Harvey due to the decreased supply of housing caused by the damage from the hurricane.16 The market has since corrected as 2020 continued to lag the national average with rents falling 2.6% compared to 1.1%. Due to the number of units under construction, as well as the 4Q20 market vacancy of 6.9%, AxioMetrics is anticipating another lackluster year from Houston in 2021 with rents projected to decrease by 0.4% compared to the national average of a 0.7% increase.17 As of the end of August, The Greater Houston Partnership estimated there were about 40k apartments under construction and to absorb these units, the region would need to create another ~240k jobs.18 The boom/bust nature of the market makes Houston’s forecast difficult to predict, but without a big shift in energy growth it’s likely Houston’s multifamily rent growth will trail the U.S. average in the near-term.
Figure 11: Houston Daily Multifamily Rents
Figure 12: Houston Rent Growths
Figure 13: Tampa vs. U.S. Projected Unemployment
Figure 14: Market Rent Growth
Tampa Bay’s further diversifying economy, affordability and positive migration forecast paints a positive outlook for the market. Although COVID-19 has negatively impacted Tampa Bay, its strong market fundamentals have positioned it to recover quickly compared to the rest of the country. Single-family residential, specifically, is projected to show an increase in homeownership over the next four years as retirees move south permanently, and Millennials take advantage of the affordability and income growth of Tampa Bay. Multifamily may have more of an uphill battle given the affordability of homeownership and the influx of new supply entering the market putting pressure on rental rates.
While the overall effect of the COVID-19 pandemic on asset classes such as office and retail is yet to be determined, it’s clear that people are voting with their feet and choosing to live in more suburban settings and lower costs housing markets – many of which are located in the Sunbelt. This migration is positive for these cities initially; however, an influx of new residents does come at an expense, as cost of living can swell and the existing infrastructure, not built to withstand the population increases, can be overwhelmed. Austin is a great example of the potential impacts of population growth with a significant increase of 32% between 2010-2020, representing a CAGR of 3% due to the influx of company relocations to the market. This resulted in a HPA CAGR of 6.6% and a rent growth CAGR of 2.3% from 2010-2020.5 Additionally, Austin now ranks among the worst in the country as it pertains to traffic and has become much more expensive than other high growth housing markets that are attracting new residents.
It remains to be seen how long these low-cost states and cities remain relatively cheap, given the increased residential demand relative to supply and ultimately where the revenue comes from to pay for the additional infrastructure that will inevitably need to be built.
1 U.S. Census Bureau, December 2020
2 John Burns Regional Analysis and Forecast, December 2020
3 U.S. Bureau of Labor Statistics, January 2021
4 FHFA, U.S. Census Bureau, Oxford Economics, December 2020
5 CoStar, January 2021
6 Utah.gov, December 2020
7 Oxford Economics, “City Economic Forecast”, September 2020
8 Oxford Economics, U.S. Census Bureau, December 2020
9 Oxford Economics, U.S. Bureau of Labor Statistics, December 2020
10 Oxford Economics, December 2020
11 CoStar, December 2020
12 Texas Monthly, “Houston Is Not Prepared for the Oil Bust”
13 JLL, “2020 Energy Outlook: Operating in a pandemic world”, November 2020
14 Rice.edu, “Transformation of Sears building into The Ion begins in May”, January 2019
15 MLS of the Houston Association of Realtors, “Houston Housing Blazes Its Way Through November”, December 2020
16 CoStar, Houston Daily Rents, January 2021
17 Axiometrics, December 2020
18 Greater Houston Partnership, “Economic Outlook: Houston Office, Multifamily Face Tough Road, Single-Family Housing on the Rise”, August 2020
19 BLS, MSA Payroll and Household Survey, November 2020
20 TampaBay.com, “Water Street Tampa’s First Luxury Condos Hit Market, starting at $2 million”, December 2020
21 CoStar, “Multi-Family Market Report: Tampa – FL”, November 2020