The housing market has been running up against a lot of obstacles, but nothing seems to slow it down. Prices have continued to rise while buyers clamor after a tight supply of homes, and builders struggle with supply chain issues and construction costs. Today's guest will talk about the crazy demand for housing, and how that might play out in the coming year. Danushka Nanayakkara-Skillington is the Assistant Vice President of Forecasting and Analysis for the National Association of Home Builders. She oversees research into the housing market including industry surveys and various forecasts for national, regional, long-term, and remodeling expenditures. Danushka shares her thoughts on 2022 in this episode. You can also check out new trends for real estate investors by joining our network RealWealth, for free, at realwealthshow.com. As a member, you'll have access to the Investor Portal where you can view sample property pro-formas and connect with our network of resources, including experienced investment counselors, property teams, lenders, 1031 exchange facilitators, attorneys, CPAs and more. And please remember to subscribe to our podcast and leave a review if you like what you hear! Thank you! TRANSCRIPT [music] Speaker 1: You're listening to the Real Wealth Show with Kathy Fettke, the real estate investors resource. Kathy Fettke: The housing market has been running up against a lot of obstacles, but nothing seems to be slowing this wild real estate market. Prices have continued to rise while buyers clamor after a tight supply of homes. Today's guest will talk about the crazy demand for housing and how that might play out in the coming year. I'm Kathy Fettke and welcome to the Real Wealth Show. Danushka Nanayakkara-Skillington is the assistant vice president of forecasting and analysis for the National Association of Homebuilders. She oversees research into the housing market, including industry surveys and various forecasts for national, regional, long-term, and remodeling expenditures. She's here with us on the Real wealth show to share her insights. Danushka, welcome to the real wealth show. Danushka Nanayakkara-Skillington: Thank you much, Kathy. Thank you for having me. Kathy: What an interesting time to be in the home building business. It's crazy out there. What is going on? We knew that there were lumber shortages, but now it seems there are shortages of all kinds of things. Can you give your input on that, your perspective on what's going on with the supply chain? Danushka: Yes, lumber was a big issue last year, and even this year. I think it peaked in July, and lumber prices were adding, like $36,000 to a single-family home and $10,000 to an apartment. Prices were insane. It went down actually. It's the other stuff that goes into residential construction. Input to residential construction is up 22% year over year. Steel and wood products are driving up the prices. Not only that, the builders are seeing these shortages in appliances, [00:02:00] every type of pretty much building construction, and also, everything that goes into a house. There is so much of wait time, long delivery times. In a nutshell, it's fair to say that the supply chains are a mess. The builders are really feeling it because 2022 was a crazy year with this renewed interest in housing, so the demand skyrocketed. The builders are trying to meet that demand, but the supply side is the biggest obstacle to it right now. Kathy Fettke: Yes. Now we're hearing about all these shipping containers sitting on the ocean not being able to unload, add another issue here. I don't expect you to have the answers to everything. I'm wondering if, you know why are all these shipping containers sitting there with the things that we need? Danushka: I also read that article last week that came out 70-something ships in LA, 20-something ships in Georgia, and they've never seen that happen before. I have no idea why. All I read was that we need to get Christmas shopping done ASAP. [unintelligible 00:03:19] Kathy Fettke: Yes, it says something about the lack of workers or increased demand. We all need to get-- The bottom line is those materials and supplies, it may not be a shortage so much as an ability to get it to who needs it at this time. What a challenging time for builders who have never had much demand. Where are we now in demand? Is demand today as high as it has been over the past year, or is it starting to wane? Danushka: The demand is there. [00:04:00] I think the buyers are pulling back a little bit because of the high house prices. The demand is coming from the demographic shifts that we have seen. The Millennials are in their peak homebuyer years. You know we define peak home-buying years as 25 to 45. They're in the peak home-buying years. Also, the housing deficit. The chronic underbuilding that we've seen in the last decade is also what's contributing to this demand for housing. They are pulling back a little bit right now simply because of the [unintelligible 00:04:40] mentioned the high house price, but there's not a lack of demand right now. Kathy Fettke: That's really a challenge, right, to bring in affordable housing at this time when material costs have gone up so much and labor costs and permit fees and the delay time. When a project is delayed, that is not a free deal for the builder. They usually have debts to pay during that time and the profits margins get squeezed anyway. Then if pricing hits a cap of affordability, people just can't afford the cost of a home because it's become so expensive to build it. What do you do? It's a catch 22. We need more housing. We need it to be affordable, but costs are simply really high. Danushka: Yes, exactly. On the supply side, we covered the building materials, the lack of skilled labor. [unintelligible 00:05:36] is driving up labor cost. Regulatory cost, you just mentioned, makes up almost a quarter of a house price right now. Then, the lending issues, also especially for small builders, that makes the majority of home builders. If the lending conditions are tight, it's hard for them to get financing. Yes, it's a [00:06:00] big-- The lot shortage, too, the availability of lots. When there is a shortage of lots, what happens is the lot value increase. Because of all these, the cost of construction has gone up. Affordability is at the lowest point right now in a decade. At NHB we measure that by the NHB WellsFargo housing opportunity index. That's at 57. What 57 means is only 57% of the new and existing homes are affordable to a typical family, and a typical family makes a median income of $80,000. Affordability is in the forefront for sure. Kathy: Are you seeing builders succeed at supplying affordable housing at this point? Danushka: Entry-level housing is hard to measure. An interesting stat to look at is that a house that the price below $30,000 for new construction. In August, it was around 30% of new home sales were priced below $30,000. Compared to 2019, there were 43% of new home sales were priced below $300,000. You can see that we don't have much affordable stuff right now. Kathy: Which is just going to maybe drive the price of existing homes up even more since new homes can't be built affordably. With all that in mind, the difficulty with builders getting homes complete, they might have some of the materials but not all the materials, and they can't get their CO until they have everything, including the appliances that they can't get. Sometimes the appliances [00:08:00] come and there's one little piece missing, and that's going to be another six weeks before that piece shows up. Delays, delays, delays. Again, builders have holding costs that cuts into their profits. What do you see the inventory situation looking like in 2022? Danushka: We are thinking for this year, single-family start to be around 1.1 million. Currently, existing home sales are only at 2.6 months supply. New home sales are at a balance at 6.1 months supply right now, but we have a deficit, a housing deficit. At NHB were estimated about 1 million. Plus, we calculate the 1.5 million [unintelligible 00:08:47] as well. Then [unintelligible 00:08:51] estimated to be 3.8 million housing deficit. NAR estimated to be 5 million. Regardless, everybody agrees that there is a housing deficit. Inventory is low simply because of that mismatch of the supply and the demand. The issues in the supply side is not going to be fixed right away. There's going to be a mismatch for demand-supply next year, too. Kathy: That could drive prices up further, do you think? Danushka: Yes. This year, we expect the home price is going to be around 15%. It's going to stabilize next year, around 5% growth simply because of the pullback from demand a little bit. Hopefully, there will be more turnover, essentially. Some people like move-up buyers, they're selling their starter homes and going to a bigger home. Hopefully, there'll be a little bit better inventory next [00:10:00] year and that should help stabilize the prices. Kathy: Again, it's so funny because it was just a few years ago that there was headline news that all these Baby Boomers were going to be downsizing and there would be this flood of homes on the market. I remember scratching my head and thinking these Baby Boomers aren't like seniors in the past. They're very athletic. Not all of them, but they have some savings, they want to stay at home. Especially after the last few years, they're not keen on going into nursing homes. We see people living longer. How did economists miss this? In other words, there was this concern that there would be a flood of homes on the market and it's just the opposite. Danushka: I think that shows you that we are not perfect in quantifying human behavior. [chuckles] I think the COVID-19 pandemic was really different to any economic situation that we've seen before. It was really hard to grasp what the economy is going to look like and also what the consumers and then the buyers and home buyers, what we really want, what everybody wants. You're right. Baby Boomers are not downsizing. We are seeing a demand for multi-generational homes now, so bigger homes and people are using their homes for more purposes right now. Young people are living with their parents longer and also on the remodeling expenditure side, I think our surveys are showing too that they demand for aging in place work as well. That shows that the Baby Boomers are actually staying in their houses without selling it and [00:12:00] downsizing it. We were expecting that the 55 plus, like [unintelligible 00:12:05] they would move to the cities or some communities. I think COVID-19 pandemic freaked everyone out. No one wants to live so closely next to each other, to other people. Everybody wants to live in their own house and [chuckles] be at arm's length. Kathy: If you're staying in a luxury condo and you don't get to use the amenities or you're stuck in an elevator with other people and-- Danushka: Yes, exactly. Kathy: There's a lot of changes that took place. Oh my goodness. We know that institutional funds are flooding to build to rent, building communities that are horizontal apartments because that's really what people want. They want a yard for their dogs and for their children and in case we just see variant after variant and we're all stuck at home again, they want to know that they've got a nice place to be. What is the impact of the build to rent? I've heard some people say we're really turning into a renter's nation. Would you agree with that? Danushka: Not really because build-for-rent share is still small. When you look at the single-family market, we think it's around 5% to 7% of single-family starts. [unintelligible 00:13:30] room to grow, for sure. There are larger estimates, but we use the census and the NHB serveys to compute our estimates. The single-family build for rent is a good solution for people who are not ready to buy yet, but who need additional room, more for their housing needs. You hear this on the [00:14:00] news a lot saying that everything's going to be build for rent. I don't think it's that. I don't think we agree with that to that extent. We think it's still a niche market, small market, could be rising but not to the levels, I think, what a lot of other people are estimating it to be. Kathy: Not making such an impact. That makes sense. Now, interest rates. That really could slow down things if prices are going up and then interest rates go up and the cost of a home, or I should say the mortgage becomes that much more, that could have an effect on the market. Do you anticipate that interest rates will rise next year? Danushka: Yes, we do. I think even in the recent weeks also the interest rates have gone up a little bit. We do think because the fed is going to tighten the monetary policy. I think 2018 was a really good example to see what happens when the interest rate rising. We saw a housing soft patch and slack conditions when the interest rates were increasing. Definitely, interest rates will rise, but it's still at historic level when you look at the rates that were in the '90s. We don't anticipate the rates going to those levels at all. Kathy: There was quite a bit of a slowdown for new home builders and that again has me concerned that it will exacerbate the problem. If builders are already squeezed on margins, what's the incentive to build? You're not going to build homes that you lose money on. If interest rates go up and therefore, the market slows down and maybe prices soften, there just won't be incentive to build more unless there's a way to build cheaper and maybe that's coming. Who knows? Maybe once we get past this supply [00:16:00] chain issue, prices will come back down and labor won't be so expensive and they'll be able to build more affordably at that time, but time will tell. Right? Danushka: Time will tell, exactly. [chuckles] I think it will be a good conversation to have next year at this time, to see not things have changed or if it has changed at all. Kathy: Oh, well. Let's see. You are the Assistant Vice President of Forecasting and Analysis. That's quite a job. Wow, that's a big job. Do you think there's any chance that we could be overbuilding? In other words, we do know that there's a really large cohort of Millennials turning home-buying age, but then what after that? Like, let's say 2050. If I went out and bought 20 homes today to rent out, would I be having trouble renting those out in five years? Danushka: I think that a good way to look at that is the population profile in the country. Millennials are the largest living generation. They make up 27% of the population. Then come the Gen Zs. Gen Zs are a smaller cohort compared to the Millennials. I think the Millennials are much like the Baby Boomers. Large cohorts makes big impact and the Gen Zs are something close to probably the Gen Xs. Now they're smack in the middle of large cohorts. I think the fall and also the falling birth rates as well across the country, that could mean lower housing demand in about 10 to 15 years. Not in the next five years, but I think the long-term. 10 to 15 years, we could see a slow down in the demand for housing. Kathy: Fascinating. Are there parts of the country that are [00:18:00] growing faster than others and where housing is needed more desperately than other areas? Danushka: Yes. I think the South is a-- Half of the home building takes place in the South. It's the weather. The retirement communities are a huge attraction for home building. The West has always had high demand for housing. If you think about it, we need more affordable housing on the West Coast. On the Western states, for sure, high population not much housing stock, so the house prices are rising much faster in that area, for sure, so we need housing and maybe even better zoning rules in those states. I think the larger states, the Southern cities like Atlanta, Dallas, Tampa, Phoenix, those are big market that we expect lots of growth in the next couple of years. I think also the telecommuting that people took on last year has also spread immigration to those large markets as well. We will see lots of demand for housing in those markets. Kathy: I don't know if you can speak to this question because it's very local, but I always thought it was strange that just two to three, maybe four hours out of San Francisco, there hasn't been a lot of growth. There's a lot of land in the Chico area in Redding and Oroville and we just haven't seen these retirement communities pop up the way we do in Arizona. Perhaps it's because of the tax laws. Maybe retirees would rather be in Arizona. If they're going to deal with hot weather, let's go to Arizona instead of Redding. I just found that interesting. When you say we should be developing the [00:20:00] West Coast, there's a whole lot of places on the West Coast that have not been developed and that are still pretty affordable, but just not of interest. Do you have any thoughts on that? Danushka: I could speculate a little bit. I would say California has different regulatory land development rules, probably compared to Arizona. That probably is a big factor with zoning rules. That could be a big thing. Also, who knows, maybe Arizona has everything retirees hope for. Kathy: Yes. If you don't have to pay state income tax as a retiree, that's a big bonus if you're on a fixed income, for sure. Danushka: Exactly. Kathy: If you're going to choose, you'd probably just go over the border. Go over to Nevada or-- Okay, Nevada or Arizona? I don't think Arizona has no state income tax, but I think it's lower, at least. Okay, well, that makes a lot of sense. Yes, I agree with you. The cost to build in California is so expensive. With our project in Dublin years ago, I think it was $120,000 just for the school fees and all the permit fees just before you can even get started on development. How do you create affordable housing in that scenario? Well, it's been really a pleasure to have you here on the Real Wealth Show. Any last thoughts for our listeners? They're mostly buy-and-hold investors. They buy properties and rent them out. Danushka: I think we are in a very exciting year. The last couple of-- 2020, 2021, the next couple of years, still very exciting for housing. We've never expected this amount of interest and demand for housing. I think it's just a matter of we sorting out the supply side issues in order to meet this rising demand. I hope we can rise up to the challenge. Kathy: Wonderful. All right. Well, thank you again so much for being here on the Real Wealth Show. I hope to have you back next year. Danushka: Thank you so much, Kathy. Thank you so much for having me. [00:22:00] Kathy: Thank you for joining me here on the Real Wealth Show. You can also check out new trends for real estate investors by joining our network for free at realwealthshow.com. As a member, you'll have access to our investor portal where you can view property proformas, and connect with our network of resources, including experienced investment counselors, property teams, lenders, 1031 exchange facilitators, CPAs who specialize in real estate, and much more. When I mean much more, I mean over 500 webinars that are free, that will teach you the ins and outs of being a successful real estate investor. In return, all we ask is that you subscribe to our podcast and leave a review because it makes a huge difference for us in our rankings. I'm Kathy Fettke, and thanks for listening to the Real Wealth Show. [music] Speaker 3: The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to realwealthshow.com. [00:23:06] [END OF AUDIO]