RISI Housing Report An Update on the Housing Market

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1 RISI Housing Report An Update on the Housing Market North American Conference October 2018 Jennifer Coskren Senior Economist

2 Agenda Current housing demand and demographic conditions Supply and impediments to faster production growth Housing starts forecast and the tax reform bill Other end use markets 2

3 With Housing Goes the Economy Housing accounts for 15 18% of GDP according to data compiled by the NAHB Buoyant housing market integral to supporting consumption The Multiplier Effect Housing is one of the last games left in town 3

4 US Housing Market: Crisis of Undersupply Ingredients for a housing crisis Shelter occupancy high Household formations (demand) growing faster than additions to shelter stock (supply) Shelter prices (rent and home prices) escalating significantly faster than inflation This time around is different Solid employment and wage gains More stringent lending standards Speculative building nearly non existent 4

5 US Job Growth Remains Healthy Change in US Total Payroll Employment, Millions

6 Household Formations Are Growing Millions, Trend Level =

7 But, Not Strong Enough to Have a Meaningful Impact on Pent Up Demand Demand, Millions of Households

8 Mortgage Rates Remain Near Historical Lows, but Rates Are Rising and Access Is Restricted 30 Year Fixed Mortgage Rate, Monthly

9 Mortgage Availability on the Rise but Nowhere Near Previous Levels Mortgage Credit Availability Index Source: Mortgage Bankers Association 9

10 As Mortgage Debt to Income Remains Low Mortgage Debt Service Payments as a Percent of Disposable Personal Income, Percent, Quarterly, Seasonally Adjusted

11 Despite Delayed Marriage Rates, Population Distribution Bodes Well for Housing Demand Marital Status When They Were Silent 54 Boomer 42 Generation X 29 Millenial Married Separated/Divorced Never Married Source: Pew Research Center 11

12 Net Additions to Shelter Stock Fall Short of Household Formations Annual Net Additions to Shelter, Millions Delta Shelter Stock (Annual, Millions) Avg: 1990s Avg: Avg:

13 Market Has Tightened Now That the Correction in Transactional Inventory Excess Is Complete Excess Inventory of Vacant Units (Million Units) For Sale For Rent Off the Market 1.0 1Q02 4Q03 3Q05 2Q07 1Q09 4Q10 3Q12 2Q14 1Q16 4Q17 13

14 Most of these held off market are no longer foreclosures Quarterly Distribution of Other Vacant Housing Units (%), Second Quarter 2018 Personal/Family Reasons Needs Repairs Being Repaired Other Write in/don't Know Preparing to Rent/Sell Storage Extended Absence Legal Proceedings Possibly Abandoned/to be Demolished/Condemned Foreclosure Specific Use Housing

15 US Housing Production Hampered by Factor Inputs Demand Limited access to credit and school debt burden bolstered rental market demand This held back the recovery for single family starts, although that market had a stronger 2017 Supply Scarcity of lots along with increased regulatory fees and policies Construction labor difficult to find and material prices have been much higher in 2018 Now the rental development market is weakening as developers find it difficult to switch from luxury construction to more affordable rental units 15

16 Constraints Make It Difficult to Supply First Time Buyers New Home Sales by Price Under $200K Over $500K

17 Net Result: Very Tight Shelter Market Shelter Occupancy Rate, Adjusted* 96.0% 95.5% 95.0% 94.5% 94.0% 93.5% * Adjustment: Shelter stock, second homes, bank owned homes. 17

18 Limited Supply Tempers Home Sales Gains 7,000 New and Existing Home Sales (X 1,000) 1,600 6,000 5,000 4,000 3,000 2,000 1,000 0 Existing New (R) 1,400 1,200 1,

19 Escalation in Home Prices Running Well Above Overall Inflation and Wages Case Shiller US National Home Price Index and CPI 20% 15% 10% 5% 0% 5% 10% 15% Case Shiller CPI U

20 Multifamily Completions Outpacing Single Family Completions US Housing Completions (Millions) and Multifamily Share (Right Hand Scale) % 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Single family Multifamily Multifamily Share 20

21 Despite Additional Supply, Apartment Market Is Still Tight US Rental Vacancy Rate, Not Seasonally Adjusted 12% 10% 8% 6% 4% 2% 0% 1Q95 1Q97 1Q99 1Q01 1Q03 1Q05 1Q07 1Q09 1Q11 1Q13 1Q15 1Q17 Source: FRED. 21

22 The Residential Construction Market Grows More Concentrated Top Ten Homebuilders Market Share (%) Source: Builder Online. 22

23 Skilled Construction Labor Still Difficult to Find Job Openings and Hires, Thousands Openings Hires Linear (Openings) Linear (Hires)

24 Immigration Policy Matters Foreign Born Share of the Civilian Labor Force 18.0% 17.0% 16.0% 15.0% 14.0% 13.0%

25 Residential Construction Labor Force Down, But Not Out Residential Construction Labor (Millions) Specialty Trade Contractors Buliding Construction Sq. Ft. Starts (R) Billion Square Feet of Residential Starts 25

26 Fundamental Demand for Shelter Continues to Improve Beware of New Paradigms 1970s 1980s 1990s Household Formations Net Removals Second Homes Total

27 Housing Outlook: Demand Shifts to New Construction with the Single Family Share Improving Slowly US Housing Starts, Millions, Annual Single Family Multifamily Single Family Share (R) 90% 80% 70% 60% 50% % 27

28 Pace and Magnitude of Current Recovery Well Behind Past Recoveries Trough to Peak Housing Starts, Million Units

29 Implications from the Tax Reform Bill Tax Reform Bill of 2017 Doubles the standard deductions Caps the amount of state and local deductions to $10,000 Limits the amount of mortgage homeowners can deduct to $750,000 worth of debt, down from $1 million Interest on home equity loans and lines continues to be deductible, but only if the credit is used to make home improvements Bill not likely to impact the housing market in aggregate But could make coastal cities less attractive May shift buyer demand to the South and Midwest 29

30 Remodeling Market Index Consistent growth in additions and alterations Major Additions & Alterations 20 Minor Additions & Alterations 10 Maintenance and Repair Neutral Market Source: National Association of Home Builders. *Major additions and alterations are valued at $25,000 or more. 30

31 Major US End Use Markets for Wood Products Average Annual Growth Housing Starts (Million Units) % Change 7.1% R&R (Billion 2005$) % Change 5.3% Nonresidential (Billion 2005$) % Change 6.2% Industrial Production (2007=1) % Change 2.6% 31

Thank you for your attention For more information: Jennifer Coskren, jcoskren@risi.

risi.com/woodpanel5year www.risi.com/woodpanel15year Lumber, Structural Panel and PB/MDF Commentaries www.

32 Thank you for your attention For more information: Jennifer Coskren, North American Lumber & Wood Panels 5 and 15 Year Forecasts Lumber, Structural Panel and PB/MDF Commentaries

The U.S. Economic Outlook

The U.S. Economic Outlook Presented to: Maquiladora Industry Outlook Conference September 29 2006 Presented by: Patrick Newport Principal, U.S. Macroeconomic Service 781-301-9125 patrick.newport@globalinsight.com