Although driven by many different factors, residential and commercial real estate markets are inter-related in many ways. Savvy commercial real estate investors should pay careful attention to statistics such as natural population growth, net in-migration, unemployment rates, and of course interest rates.
All of these items greatly affect investors perceived vitality of a given market. Population growth leads to a greater need for housing and retail properties and also creates demand for employment. With employment growth comes the need for additional industrial and office commercial real estate. These are some of the reasons that Utah has been such a sweet heart for commercial real estate investment over the last 5 years. Commercial real estate investors inside and outside the Utah market love the vitality of this young and growing population and business leaders have recognized Utah as a great place to locate their companies to be able to capture much of this young talent.
Based on these sentiments you would expect that the residential housing market would be off the charts along the Wasatch Front — but it is not. 2014 actually saw slight decreases in activity over 2013. I recently read an article written by Spencer Sutherland published in Utah Business Magazine in their January issue. It discusses many of the residential Utah real estate trends over the years and what the market is currently seeing. I have attached the link to the article as well as the full text of the article below. A few of the interesting statistics (statewide) I found interesting were:
The articles offers potential suggestions for the trends that are being seen. As I look at these factors I always compare the statistics to what I am actually seeing in the market. The residential market actually appears to be healthy. Neither sellers nor buyers have a strong advantage. Growth appears to be steady which is promising. I might argue that the decline in new single family homes is as much as a result of a lack of available land opportunities for homebuilders as it is a decline in demand. I have had a very difficult time procuring large tracks of residential land for my private as well as governmental clients.
Provided that the major economic indicators – population growth, unemployment, and interest rates remain positive I maintain a very positive outlook on the residential market and subsequent commercial real estate investment market in Utah.
Please enjoy the article below.
It’s been more than five years since the official end of the Great Recession, and all signs point to a recovered Utah economy. In 2014, the state’s employment numbers not only reached pre-recession levels, but they also surpassed them. Those numbers came after a strong 2013, where both home sales and home prices jumped by 10 percent. That’s why 2014 was supposed to be the year the real estate market finally left the recession in the rearview mirror—but that didn’t happen.
After three quarters of flat sales and prices, the year ended with slumping sales—despite historically low interest rates. What happened? And what should Utahns expect of the real estate market in 2015?
Tough times for real estate are nothing new for Utah. In fact, since the early 1970s, the state has experienced five unique housing cycles, each with peaks and valleys.
The late 1970s were notable because of an all-time high in new home construction, driven by the needs of baby boomers. Despite the growing population and high job growth rate, homebuilders got ahead of themselves and built more speculation homes than the market could support, resulting in a steep decline for housing.
Tough times returned in the 1980s, when the over-building from the ‘70s, combined with a recession, led to a 67 percent decline in housing activity. To make matters worse, interest rates climbed to more than 18 percent as the Federal Reserve tried to address the inflation caused by rising energy prices.
All of that turned around in the late ‘90s and early 2000s. With a growing number of Utahns hitting the ideal age for home buying—ages 25 to 34—the real estate market expanded into new territory. First-time home buyers were building new homes in Lehi and Eagle Mountain, baby boomers were moving into new homes in South Jordan and Riverton, and sub-7 percent interest rates made it a great time to buy a second home in Washington County. But then things fell apart for the Utah real estate industry.
In 2008, housing activity dropped by 50 percent. A year later, single-family construction fell to the lowest level since 1989. House prices fell by 20 to 25 percent and the state lost 40,000 construction jobs.
Today, the state is still working to dig its way out of the deepest housing decline in more than four decades. James Wood, director of the Bureau of Economic and Business Research at the University of Utah (BEBR), has spent years tracking Utah’s housing ups and downs. He says this cycle’s recovery has been slower than any other.
“Four years from the trough [of a housing cycle], we’re usually back to 80 percent of the pre-recession level peak,” Wood says. “We’re just barely over 50 percent now.”
Wood says the causes of the sluggish recovery fall into two broad categories: cyclical and structural. Cyclical factors include job loss, interest rates, price declines and negative equity. What makes the slow recovery so baffling is that despite the fact the state has successfully bounced back from most of the cyclical factors—meaning employment is at all-time high, interest rates have remained low, home prices have come back up, and foreclosures have dropped off—home sales and new construction still haven’t caught up.
Structural factors—those that will affect the future of housing—are equally problematic. One structural factor is a change in Utah’s demographics. “Our age structure is not quite as favorable as it was a few years ago,” Wood says. “The 18 to 30 age group—the group that forms new households—is not as large a percent of the population as it once was and that will be the case for the next few years.” Additionally, the state’s in-migration has slowed, resulting in less need for
Income has also become an important structural factor. “If you look at long-term numbers, median household income has not changed much in real terms over the last 30 years. In fact, since 2007, median income in Utah has dropped by 7 percent,” Wood says. “When incomes are low, people postpone forming a household. They also double up in houses or stay with their parents.”
Another potential structural change is housing preference. “Some people have made the case that millennials are not as predisposed to home ownership as previous generations,” Wood adds. However, it’s unclear whether millennials are choosing to live in apartments because of a true preference or as a result of economic constraints like trouble qualifying for a loan in a tightened lending market. “The jury is still out on that structural change,” Wood says.
The impact of a slow recovery goes far beyond homeowners, buyers and sellers. Homebuilders have struggled as well. It has been tough for new construction to compete with the low price of foreclosed properties, and declining equity has kept many buyers from moving up to a more expensive home. As a result, building is down in every major county in the state.
Related industries have also felt the pain. Utah’s manufacturing sector fell by 20,000 jobs during the recession. Local companies that supply the construction industry with goods such as glass, gravel, sand, trusses and concrete took the hardest hit.
Housing woes have also impacted the retail space. “The weakness in the recovery of retail sales is traceable to the uncertainty and the unease that homeowners have now,” Wood says. “With less equity, [homeowners] are a little more hesitant to use equity for retail purchases.”
Factoring in inflation and a population increase of 250,000 Utahns, retail sales are 15 to 20 percent lower than before the recession. “I would make the case that part of that drop is due to the heavy debt load people were carrying, combined with falling housing prices. That contributed to uncertainty and caution with retail activity,” Wood says.
Not surprisingly, the retail segments that are having the hardest time recovering are furniture stores and home and garden retailers. “Those are big employers and they lay people off,” Wood says. “You can see it directly. The weakness in the recovery and the weakness in the housing sector affected retail sales in those two categories and we’re still seeing it.”
Despite the overall sluggishness of the housing recovery, there are plenty of positive indicators for the future. The market is seeing decent gains at the higher end of the price spectrum, with home sales in the $500,000 to $750,000 range up 9 percent year over year and the $300,000 to $500,000 range up 12 percent.
Why the lift in more expensive homes? “We saw a period where people who didn’t have to move chose not to because of the uncertainty in the economy,” says Rick Southwick, president of the Utah Association of Realtors. “People have some confidence again. They’re taking advantage of improvements in their equity position, selling existing homes, and moving up to larger, more expensive homes.”
Mid-level homes, ranging from $200,000 to $300,000, are also moving. Houses below that range, however, are not. “There haven’t been as many sales of starter homes because of a lack of inventory and qualification limits,” Southwick says.
Qualifying for a home loan continues to be tough, especially for first-time buyers. “We see statements in the media that lending is starting to loosen up, but we haven’t really seen that happening yet,” Southwick adds. “Right now you still have to have excellent credit to get a loan.”
Over the past year, there have been pockets of strong home sales around the state. Through September 2014, Utah and Tooele counties saw an increase of 6 percent in sales and Davis County’s sales jumped by 5 percent. “These areas are outside of the city center, so land is less expensive,” Southwick says. “There is still room to grow and there is a lot of new construction.”
Home prices increased the most in Uintah County, where the average sale was up 13 percent over the previous year. This increase was driven largely by in-migration to the county, stemming from the boom in oil and gas production in the area. Wasatch County home prices increased by 6 percent, driven in part by the area becoming a popular second home destination.
Across all counties in the state, 2014 sales benefitted from unexpectedly low interest rates that hovered around 4.1 percent and even dropped below 4 percent toward the end of the year.
Southwick anticipates that 2015 will largely look like 2014. Neither buyers nor sellers will have a noticeable advantage, though it’s still common for sellers to pay some part of the buyer’s closing costs.
It seems unlikely, however, that interest rates will remain as low. The National Association of Realtors expects rates to hit 5 percent by midyear. Despite the uptick, the association predicts the number of both new and existing homes to increase.
Despite the association’s optimism, Southwick worries about the impact of rising interest rates. “I’m not sure how much of an interest rate the market can sustain in the current economy,” he says. “From a historical perspective, 5 percent is still a great rate; it’s just higher than what people are used to. In the lower price ranges, it has an impact on what people are able to afford. If we see enough of a rise in interest rates that could put some downward pressure on prices.”