Forecast Top Ten: What drives performance?

How outstanding are these metro areas?

Both existing home sales and median sales price in each of these areas will grow at rates considerably above the national rate. Nationally, we expect sales to drop 2.0 percent, while on average we expect, the top 10 metro areas’ sales will increase by 4.0 percent. Nationally, we expect prices to rise by 2.2 percent, while on average we expect, the top 10 metro areas’ prices will increase 5.6 percent. We could describe how much they stand out, but a picture is worth a thousand words. Take a look at the bar chart. While sales will fall two percent at the national level, they will be growing one to eight percent in the top metros. Prices will grow two percent nationally, while they will grow three to four times as much in some of the metros.

What causes a metro area’s housing market to outperform the national average?

Several factors are common to most of the top 10, which create the conditions for particular markets to outperform the national average. On the demand side, these include, a growing economy measured in growing employment and income, growing population due to either in-migration or natural growth, and a high proportion of young couples at the stage of life of starting and growing families.

On the supply side these include affordable housing, available land, labor and capital for building new homes and an older population looking to downsize, move to senior facilities, move in with their children or have passed away leaving a home for their children to sell.

Growing economy – All but one of the top 10 metros is expected to have employment growth in 2019 in excess of the national average with an average of 2.1 percent for the top markets vs 1.3 percent nationally. Only half of the top 10 metros are expected to have income growth in 2019 in excess of the national average, however, the average for the top 10 (3.83 percent) is higher than the national average of 3.55 percent.

Growing population – Almost all of the top 10 metro area populations are growing faster than the nation. Only Boston, is not growing as fast as the national average. On average, the top 10 are growing 2.0 percent compared to 0.65 for the nation as a whole.

A growing young and Millennial population – A high proportion of the population that is at the right stage of life, with money, stability and the incentive of a growing family will be looking for a home to buy. For the most part, these are Millennials. This younger demographic is a net demander of housing, assuming they have the income, savings and stability to take the leap into homeownership. Millennials are expected to make up 45 percent of purchasers with a mortgage nationwide. As a proxy for Millennials, those aged 25 to 34 made up more than forty percent of recent mortgage purchasers in 4 of the markets projected to do well in 2019 and additional potential is there as Millennials age. Looking ahead, these markets are expected to see the population aged 35-44 grow by more than 5 percent over the next five years compared with 3.9 percent growth for the U.S. as a whole in this age group.

Growing new home construction – In a growing population, the existing housing stock, by definition, is not enough to satisfy the demand for housing in the long run. New homes must be constructed to accommodate a growing number of households and to replace homes destroyed by natural disasters and dilapidation. Builders can supply these new homes more easily in markets with readily available land, construction labor and capital to finance their operations. Most, but not all, of the top 10 markets have readily available land to build on. Eight of the top 10 are expected to see construction employment grow faster than the national average in 2019. The top 10 markets should have a 5.9 percent growth in construction labor compared to 4.1 for the nation as a whole.

On the supply side, this means that households, at the right stage of life, will be putting their home on the market either because they are looking for a larger home, are moving to another part of the country or are downsizing after becoming empty nesters. The older demographic is a net supplier of housing. They may move in with their children, head for a senior home or die off.

When young people are buying their first home and older people are selling their last home in an area with no population growth or in or out migration, sales increase but not the total supply of homes on the market. For each starter home supplied to the market a larger home is taken off the market. With a constant population, first time buyers will roughly equal sellers at the other end of life. In growing markets, people are migrating from other parts of the country because of employment or other attractions. Buyers will exceed sellers and the inventory of homes on the market will decline, unless there is a robust new home construction industry. In declining markets, people are moving away and sellers will exceed buyers. Inventory will build and prices will fall. In some markets, particular demographics (growing number of young couples starting families and looking for a home or a large aging population and selling a home) will affect this balance.

Of course, population is not constant. It grows at a steady pace of about two-thirds of a percent each year in the nation as a whole. New homes must be constructed to supply this growing population. Add to this, a small percentage of homes, which need to be replaced each year because of damage from storms, fires or simply dilapidation.

The top ten markets are attracting new households to their areas, because of economic opportunities, such as affordable housing combined with employment and income opportunities. Many also offer local amenities like warm climate, or natural attractions, such as mountains, the sea or lakes. Others offer cultural benefits found in large urban areas. Some of the top ten are also shedding households because of the high costs of living, especially homes.

An attraction to many of the areas is affordability. But this will be temporary if builders cannot keep up with the in-migration of households. Their ability to do so is dependent on the availability and price of land, the availability of skilled construction labor and for small builders the availability of small business loans to finance their construction projects.

The table below summarizes key indicators determining the potential for a growing housing market. These are the national figures. As you read the profile for each metro area, you may want to compare their figures against the national figures to get a sense of how much stronger the demand or supply component is than the national average.

Lakeland-Winter Haven, Florida

The Lakeland-Winter Haven, Florida area, our number one forecasted housing market, has ideal conditions for a strong, rapidly growing housing market. Plentiful employment opportunities are evident by the greater than 3 percent growth in employment in recent years, which is expected to slow a bit to 2.3 percent growth in 2019. Meanwhile, median household income grew at 3.6 percent in 2017, but is expected to top 4.7 percent in 2019. The local economy, which grew 3 to 4 percent in recent years is expected to hit 4.9 percent in 2019. This strong employment and income outlook is coupled with affordability in housing with median home prices of only $138,000 in 2017 and $162,000 expected in 2019.

These strong economic opportunities are matched by the amenities of warm weather and numerous lakes scattered throughout the area. I guess that is why it is known as Winter Haven and Lakeland! The result of the sweet economics and great amenities is growing in migration. The number of households grew 2.5 percent in 2017, but is expected to top 2.6 percent in 2019.

The one downside is declining affordability with 7.4 percent price appreciation expected in 2019. Housing starts, which approached 30 percent in 2017 will still be a less feverish 7 percent in 2019. Construction labor has been growing 5 to 8 percent a year since 2015 and is expected to top 6 percent in 2019. So, if you are foot lose and fancy-free, get it while it is still hot … and if it is too hot, take a dip in one of the area’s numerous lakes.

Grand Rapids-Wyoming, Michigan

The second hottest housing market for 2019 is expected to be the Grand Rapids-Wyoming, Michigan metro area. The local economy was growing 4.2 percent in 2017, but is expected to heat up, growing 5.8 percent in 2019. This will, of course, generate employment growth, which we expect to be 2.3 percent in 2019 up from 1.4 percent growth in 2017. More importantly, median household income grew at a feverish 6.2 percent in 2016 and is still expected to grow at 2.8 percent in 2019.

A downside, for buyers, has been rapid price appreciation in recent years. This is expected to be 8.2 percent in 2019. A contributing factor in this appreciation was a slow down in new home construction. Growth in housing starts slid from 15.9 percent in 2016 to 8.0 percent in 2017 and -4.4 percent in 2018. Fortunately, it is expected to rebound to 19.3 percent in 2019, so 2020 price appreciation should cool down.

One of the attractions to the area contributing to the strong housing market is inexpensive housing and plentiful land to build on. Median home prices were $157,000 in 2017, but are expected to climb to $187,000 in 2019.

Grand Rapids-Wyoming metro area’s growth is a recent change. Prior to the recession, the economy struggled to tread water. The 2000 employment level was never surpassed prior to the recession. But in the recovery, the area took off with strong employment and income growth. In contrast, Lakeland-Winter Haven’s post recession economic growth has been slower, but is a continuation of strong pre-recession growth. One contributing factor for the Grand Rapids area, compared to Lakeland-Winter Haven was strong support for small businesses by area bankers. Small business loans (under $1m) fell to half the 2000 level during the recession in Lakeland-Winter Haven and barely surpassed the 2000 mark by 2016. In Grand Rapids-Wyoming metro, small business loans fell no where close to the 2000 level in the trough of the recession and then climbed during the recovery.

El Paso, TX

El Paso comes in third with the highest expected sales, but the slowest price growth of the top 10. Demand is high with employment expected to grow 2.2 percent in 2019 and income expected to grow 3.4 percent and a laborforce expected to grow almost twice the national average in 2019.

The key to understanding how it gains the hottest sales yet coolest prices of the ten is two-fold. Prices will be constrained by growing inventory (number of homes on the market), robust new construction spurred on by plentiful land and a steadily growing supply of construction labor. Meanwhile sales, unlike much of the rest of the country, only started growing rapidly in 2016.

Chattanooga, TN-GA

Chattanooga comes in fourth with balance high sales (5.2 percent) and price (4.3 percent) growth. Employment (1.2 percent) and income (3.3 percent) growth expected for 2019 are both slightly under the national average. However, the Chattanooga economy is growing at about 6 percent a year and is expected to have one of the lowest median price levels for homes of the top 10. Holding the Chattanooga area housing market back is a slight net out-migration of people leaving the area.

Since the recovery began, the area has experienced steady sales and price growth. In recent years, the growth rate of new construction has slowed from 14 percent in 2016 to -1 percent in 2018 and is expected to drop further in 2019. This will contribute to price growth.

Phoenix-Mesa-Scottsdale, AZ

The Phoenix area comes in fifth with stronger price (5.6 percent) growth than sales growth (3.6 percent). Employment is expected to grow (2.8 percent) twice the national average, while income (3.4 percent) growth is expected slightly under the national average in 2019. The local economy is expected to grow at a booming 7.2 percent, fueled by strong laborforce and population growth. Population growth (2.1 percent) and laborforce (2.1 percent) growth are expected to be strong in 2019. In 2018, net in migration picked up, but is expected to slow a bit in 2019, while remaining positive.

Median home prices are considerably higher than the top four metro areas, but affordability is relative to income, which is considerably higher than in Lakeland, El Paso, and Chattanooga. It is on a par with Grand Rapids. Strong price growth is expected in 2019 because 2017 and 2018 saw a rapidly dropping number of homes on the market (inventory) of 8 to 9 percent a year. Fortunately, we expect inventory to turn up slightly in 2019 in Phoenix. Housing starts increased a robust 10 to 13 percent over the last three years and we expect new construction to pick up from these levels in 2019.

Bridgeport-Stamford-Norwalk, CT

The Bridgeport area comes in sixth with 5 percent sales growth and 4 percent price growth expected in 2019. Employment (3.9 percent) and income (3.6 percent) growth are both expected to be robust in 2019. Despite this, the area will likely continue its pattern of modest out migration.

One advantage that the Bridgeport area has, is that it stands out for long-term income growth, which has been growing considerably more rapidly than employment growth, since prior to the recession. It took a dip during the recession, but continued a steady upward path during the recovery. Another advantage that it has are the amenities of being close to New York City for employment and cultural opportunities and Long Island Sound for swimming and boating enjoyment.

We cannot claim that people are streaming into the area for inexpensive homes. The median home price is $462 thousand, second to Boston’s $497 thousand among the top 10. However, given that median household incomes are the highest amongst the top 10, many people can more readily afford these prices. Income is expected to top $102 thousand in 2019.

Las Vegas-Henderson-Paradise, NV

The Las Vegas area comes in at seventh with the lowest sales growth (0.9 percent) and second highest price growth (7.9 percent) of the top 10. The robust economy, expected to grow 8 percent in 2019 is generating strong employment growth of 3.3 percent, laborforce growth of 2.2 percent and income growth of 3.9 percent expected in 2019.

The area does not provide the cheapest housing among the top 10 with a median home price of $278 thousand expected in 2019, however, household incomes of $61 thousand are commensurate. One reason that price growth is expected to be so high is that the growth rate of new construction (housing starts) slowed in 2018 to about 1.7 percent from 12 to 14 percent in the previous two years. 2019 should see housing starts rebound to previous levels or higher. Another reason for high price growth experienced in the last few years and expected in 2019 is relatively limited land. The area is bounded by national parks and natural boundaries.

Boise City, ID

The Boise area comes in at eighth and similar to Las Vegas, will have relatively low sales growth of 1.5 percent and high price growth of 6.9 percent expected in 2019. It has a robust economy expected to grow over 7 percent in 2019, generating employment growth of 2.1 percent and income growth of 3.4 percent. The population and laborforce are growing rapidly with the laborforce growing over 3 percent in recent years, but expected to slow to 2 percent in 2019. Similarly, population has been growing at about 2.5 percent in the last few years, but will slow to under 2 percent in 2019.

Home prices ($258 thousand) are expected to be almost as high, as in Las Vegas, but so too are median household incomes ($59 thousand). Throughout the economic recovery, sales in the Boise area have steadily grown until recent years. During the recession, throughout the country, there was an unmet need for housing as couples formed and families grew, while their incomes and job stability plummeted. This resulted in a pent up demand for housing that has been satisfied during the recovery. In the Boise area, unlike many other areas, sales growth recovered soon and steadily grew throughout the recession.

Miami-Fort Lauderdale-West Palm Beach, FL

The Miami area comes in ninth with 3.3 percent sales growth and 5.0 percent price growth expected in 2019. The local economy is expected to grow at a robust 6 percent, resulting in 2.4 percent employment growth, a whopping 5.9 percent income growth and an unemployment rate falling below 3 percent. Adding to these demand factors is an expected slight in migration.

Median home prices ($267 thousand) are in line with Boise and Las Vegas, but so too are incomes ($59 thousand). Throughout the recovery, Miami has experienced high price growth and stagnant sales growth. The unavailability of developable land in the Miami area, which is bounded by the sea to the East and the Everglades to the West, contributes to steadily growing prices since the recovery began. Another factor affecting price growth has been declining housing starts in 2016 and 2017, which turned around slightly in 2018. We expect a considerable increase in new home construction in 2019, however, this will likely relieve price growth only by 2020.

Boston-Cambridge-Newton, MA-NH

The Boston area comes in tenth with 3.6 percent sales and 4.6 percent price growth expected in 2019. A robust local economy expected to top 5 percent drives this performance in Boston just as for other top-ten markets. Employment should grow 2.4 percent and income 3.9 percent. A lower unemployment rate, expected to drop to 2.9 percent, will contribute to strong consumer confidence. The laborforce is expected to grow more than 2 percent, however population growth is expected to be a mere 0.5 percent, which is lower than the national average. Laborforce growth in excess of population growth can come from a growing working age population relative to other age groups and by drawing discouraged and other marginal workers back into the laborforce. Similar to the Bridgeport area, Boston’s income growth has exceeded its employment growth considerably since before the recession with a slight dip during the depths of the recession.

Similar to Miami, the Boston area too has a hard constraint on the availability of land. However, the constraint is only on one side – the sea. New construction in recent years has been variable. Housing starts grew 17 percent in 2016, fell 2 percent in 2017 and recovered slightly by 1 percent in 2018. We expect starts to grow considerably in 2019. However, this will likely relieve price growth only by 2020.

Sources:
Sales and Price forecasts: Realtor.com
Mortgage Data: Optimal Blue
All Other Data: Moody’s Analytics