How long will the high last?

We have gotten many inquiries about how long our economic high in Texas will last. I know that I have written about this a couple of times during the summer, yet the questions continue to focus on the negative rather than the positive.

Remember I am just an analyst, with no crystal balls or otherworldly skills that we are aware of. That said, I think the housing market (regionally as well as nationally) will continue its growth short term as well as long term.

Here are some basic facts that hopefully will show you the upside of real estate and the economy coming out of the worst recession in memory.

Population growth and household formation

The most boring economic statistical trend is U.S. population. It grows by one percent each year, a gain of about 2 to 3 million. The trend arises from about 4 million live births and about 2 million deaths in the U.S. each year. Legal immigration makes up the remainder.

More people should mean more housing demand. But that is not always the case. What really matters is household formation. One household can be one person living in a city apartment, or six people living in a two bedroom apartment. One household can also mean a family of six living in a suburban home. Population growth therefore can be accompanied at times by no growth in households if a young adult moves in with their parents. Currently, there are a record number of such cases here in our Texas metros. Such crowded living arrangements do not create housing demand.

Historically, there were about 1.2 to 1.4 million net new household formations each year in the U.S. The figure is typically low during an economic recession and downturn and typically bounces higher as better economic times return. Household formation has been running at half the normal rate for two years and slower the last seven straight years. The graph below tells the story. The Census Bureau reported that over the past four quarters, net household formations totaled only 458,000, compared with long-term projections by the Joint Center for Housing Studies of 1.2 to 1.3 million per year.

This is improving; the number of persons per household has increased by 2.6 percent since 2005, going from 2.69 to 2.76 persons per household. In projecting, if the persons per household had held steady over that period there would be an additional 3 million households today.

voice graph 8-29

Source: US Census

It seems nearly impossible for household formation to remain as slow as it has been. Remember the largest single age group in the US is 23 year olds. They have just begun to think about shelter outside of Mom and Dad, much less a home purchase. Therefore household formations are bound to increase. That in turn will create demand for both rental and ownership housing. Home sales and housing starts will therefore mostly rise in the coming years. Those in turn cause a rise in construction which again helps the economy, construction, and housing.

Now a crucial thing here is that while the 20-to-24 cohort is the largest now, in a few years, they will be prime-age workers: 25-to-29, the age at which people really begin to earn better money and buy homes and cars. The demographics are very favorable to apartment renting. And so of course these days, the multi-family housing sector has been strong. You hear all these stories about how people aren’t into homeownership anymore. But the demographics that are currently favorable to apartments will turn into demographics favorable to homeownership, as the cohort gets older, moves into higher paying jobs, and wants more space for those new babies.


Everyone needs shelter. The U.S. rental market has been strong in 2014, with rents increasing at an annual clip approaching 4 percent, builder confidence soaring, and vacancy rates below 5 percent in big cities and at a 17-year low nationally. Over the long run, you should expect demand for multifamily units to be stronger than prerecession levels due to a lack of accessible credit and age demographics. As the economy continues to improve and pent-up demand releases, demographic trends will be disproportionately favorable for the multifamily sector due to the young adults comprising a large share of suppressed household formation. When you look in our Texas metros, they fall right in line with this.

Homeowner and rental vacancy rates suggest that the number of houses and rentals available is shrinking. Vacancy rates simply refer to the percentage of properties which are unoccupied. A look at the data from the U.S. Census Bureau demonstrates that rental vacancy rates are falling sharply, while homeowner vacancy rates remain low. The lower the number, the fewer properties there are available to rent or buy. Look at your own community, how many homes are for lease or sale? Not many. Those that do come on the market have multiple offers, whether for sale or lease.


There is not enough land to address the needs of the population moving here. The development community, banks and equity, and municipalities are playing catch up to deliver enough lots and land for all the homes, offices, and retail that pent up demand from the last seven years has caused. That need is particularly acute in the Texas region, where three out of the four metros are two to three years behind on lot supply. Demand has stayed ahead of supply, another positive when looking at the longer economic needs of the local markets.


The labor market finally seems to be getting traction. Texas has been blessed through the recession, with Texas accounting for the majority of US job growth over the last five years. After several years of weakness we are starting to see the labor market pick up steam, having added 230,000 net new jobs on average for the first seven months of this year. Current economic projections show growth realistically averaging 3.3 percent in 2015, and the unemployment rate continuing to gradually decline. In this scenario, household formations should pick up and housing starts are projected to increase 28 percent over 2014’s pace to 1.3 million starts in 2015. Again, Texas has lead the country in having lower unemployment the rest of the country the last 7.5+ years.

Interest rates and affordability

Despite the talk that rising mortgage rates will slow demand, housing still remains relatively affordable because home values are still relatively low and rates are still historically low. The monthly mortgage payment-to-rent ratio for the U.S. is near the lowest it has been in more than 35 years. Thus, even with some increase in house prices and interest rates, the ratio will remain relatively low. Remember rates are the 2nd lowest they have been in years. Historically as rates increase, home sales slow, then the consumer realizes that rates will not retreat and they jump back into the market hoping not to lose any more traction on affordability. For every 1% increase in interest rates, the buyer loses 12% buying power. Present conditions make now one of the best times to buy ever. We are not going to hit the lows of 2009 through 2012. The market has healed and is getting stronger. The ability to find discounted inventory has passed.

The affordability index, (which measures the percentage of all households that can afford to purchase a median-priced single-family home) fell in the second half of 2013, but on a historical basis, it’s still supportive of good growth in the housing market, regionally as well as national. Readers can see that, according to the NAHB / Wells Fargo index, housing is more affordable than it was for most of the 1992-2009 period, when the bubble was happening.

voice graph 8-29 2

Home ownership still desirable

Lastly, In the U.S., owning a home is still more popular than renting. According to 2013 U.S. Census Bureau data, 33 percent of Americans rented and 67 percent owned homes. FNMA housing survey of May 2014 reported 76% of younger renters think buying a home makes more sense because it protects you from housing cost increases and owning is a good investment over the long term.

There may be a point at which renters decide that paying, say, $1,600 per month for a 500-square-foot studio apartment is too costly, especially when they could potentially pay less for a mortgage and get an entire house. For example in Austin over the last 10 years rents have gone up over 58%, home appreciation 38%, and wages 10%. The consumer realizes they have a better economic option in purchasing and controlling their housing destiny. While expensive rents are one thing, renters would also have to feel secure in the economy before making the leap to buy a home.

Currently in our regional markets, there have not been enough apartments to fulfill demand, which helps prompt would-be renters to look for a home. Many of our markets are near a tipping point on new apartment communities, which could cause concessions and a slowdown of escalating rents. This could slow those renter being pushed towards ownership.

Why am I optimistic? The housing market has been making a slow and steady recovery since the crash that led to rapidly declining home prices, record numbers of foreclosures, and an $8 trillion dollar loss of household wealth. The recovery continues to be driven by a combination of positive elements including home inventories (supply), slowing foreclosure rates, mortgage rates, availability of credit, institutional investing, and factors within the broader economy.

We are getting closer to a more normalized economy, and now we are expecting to see housing driven by fundamentals, and in fact, are seeing this in our Texas markets. The economic growth and labor market gains we saw in the second quarter of 2014 are projected to continue, strengthening household formations and the housing sector. A recovering housing sector will sustain the rally in homebuilding and construction despite likely increases in long-term interest rates. Increased construction activity will further accelerate the improvement in labor markets and fuel even more household formations and more housing demand. The result is an economy that gradually recovers back to a new normal. Nowhere is that more true than in Texas.