As economic and lifestyle conditions change, so does homeownership — and that’s impacting the building and remodeling businesses, too. By Dianne M. Pogoda

 

Inflation, fluctuating interest rates, rising home prices, lingering supply-chain woes and a housing crunch are shaking up the housing markets as well as designers, builders and remodelers, who are playing a guessing game when it comes to planning for the next 12 to 18 months.

But there are some key indicators that can provide guidance about market directions and impacts on the remodeling and construction businesses. Timothy Sullivan, Senior Managing Principal at Zonda, a housing market research consultancy, explained what’s happening at the recent NKBA Futurist Summit, “Home Ownership and the Evolving American Dream.” The summit was held in partnership with Zonda.

This session explored affordability — especially among Millennials — the strength of the multifamily market, the role of Build-To-Rent (BTR) housing, and what the market could look like over the next several years. 

“Tailwinds in the market are well-defined,” Sullivan began. “Demographics are in our favor, causing demand to grow, and fundamental demand is strong. There’s still good economic strength and employment. And we’re seeing migration from more expensive cities to less-costly markets.”

Headwinds, of course, are still there, he added, notably, inflation. The supply-chain, while improving, is still troublesome. And economic uncertainty continues to cloud consumer confidence.

How Affordability Affects Ownership

What people were able to afford with a 3 percent mortgage compared to a 5 or 6 percent mortgage is dramatically different, he said. “If a homeowner could afford the monthly payment on a $750,000 home at 3 percent, the equivalent payment at 5 percent buys them a $590,000 home, and at 6 percent, affordability drops to $525,000. So what do buyers do? Buy a smaller home? Rent?” 

Zonda’s builder surveys reveal some buyer hesitancy owing to higher interest rates, and potential buyers failing to qualify for loans, or no longer qualifying for the amount they could once afford. Homes with inflated prices are also not achieving high-enough appraisal values for the mortgages required to purchase them. And this all happened very quickly, putting some shockwaves into the for-sale side of the market. So rental housing becomes more of a possibility.

Consumers are adapting to higher mortgage rates and home prices by looking at different loan options from the 30-year fixed; they’re stretching their budgets to make more money available for monthly payments; they’re paying down other debt to qualify for loans; they’re buying smaller homes, and are waiting to see what happens while continuing to rent. 

“On the other hand,” he observed, “wealth accumulation has risen, so there are people who can buy with cash – and they’re not really concerned with interest rates. Tapping increased home equity, which wasn’t as great four or five years ago, is a big motivator causing people to move. They can move from expensive markets like San Francisco or Los Angeles to less-expensive cities like San Antonio, Tucson, Jacksonville or even Chicago, and get 60 to 80 percent more for their money. 

The top five markets for net migration that people are moving into, include Austin, Jacksonville, Raleigh, Phoenix and Tampa. Rounding out the top 10 are San Antonio, Charlotte, Tucson, Riverside, Ca., and Oklahoma City.

There’s growing strength in the multifamily market, but there’s very little availability. Occupancy rates are high — 97 percent in some markets — nearly fully occupied, definitely stabilized. But while rents have gone up between 30 and 40 percent in some markets, it’s still more affordable than buying for many people.

Millennials in the Market

Looking at the Millennial market, Sullivan said that 44 percent of Millennials currently own a home under 2,000 square feet, down from 70 percent who owned a smaller home pre-pandemic. Why the change? “There’s a growing share of Millennials who are moving up. They’re starting to form their families and therefore buying larger homes,” he explained, “some of them are able to move further away from business hubs because they can work from home, and they can afford larger homes in the less-expensive outer suburbs or less expensive markets. So ownership rates went up. This has changed the way builders were building: more buyers want larger homes.”

The Build-To-Rent Sector

As people age, they are more likely to own, and while rental demand crosses generations, it is led by younger age groups. However, Boomers are becoming a new rental market because they are following their kids to be closer to family as their kids move around the country.

Among Millennials who don’t own a home, the top reasons are affordability and student debt. So, with this steady renter demand, the BTR market has ballooned. Today’s BTR market is different from previous markets, Sullivan noted. There are now more single-family detached homes with garages, six to eight housing units per acre, and 1,400 to 2,100 square feet, three to four bedrooms. These are built on individual, single lots and can be sold as individual homes. Families with kids at home are more likely to rent these units.

This compares to classic horizontal apartments, with higher density of 10 to 15 housing units per acre. They’re smaller, 650 to 1,100 square feet, with one to three bedrooms, detached garage or carports. Singles and couples without kids at home are more likely to rent in the horizontal apartment market.

Top BTR markets include Phoenix; Dallas-Fort Worth; Jacksonville, Fla.; Columbus, Ohio; the Carolinas, Southern California; East Texas, and Florida. Phoenix is a benchmark market, and between what’s already there and what’s in the pipeline, BTR is on track to double in size within the next year or so. So far there has been no indication of market saturation, he said.

The Bottom Line

Many Boomers are staying put. They are in a home that works for them, space-wise and financially — especially with a 3 percent mortgage and abundant home equity. Also, adult children of Boomers have been coming back for temporary housing while they go through changes in their own life direction. This is good for remodeling — the longer people are in their homes, and the more their function changes, the more likely they are to need remodeling help. Age of housing stock also bolsters the remodeling market.

There’s still strong housing demand, but consumers are responding to costs, Sullivan concluded. The current economic uncertainty will last for a while, so embrace the fundamentals, consider multigenerational solutions, including extensions [read: massive remodeling opportunities] and ADUs (Accessory Dwelling Units), which are changing the way we can live and use our lots. “Think about markets that are rich with remodeling opportunities and how you can target and serve them.”

The NKBA Futurist Summit, sponsored by Signature Kitchen Suite, is available to watch on-demand here.