MAKING CENTS — The Outlook for 2012 and Beyond
Despite market volatility, positive economic trends show that incomes continue to grow and the nation continues to add jobs, albeit at a weak pace. While housing has turned somewhat of a corner, the recovery will likely be slow but steady.
Despite all of the negative news, market volatility, and the grim prognoses of the TV pundits, the U.S. economy is not likely to fall back into another recession. Yes, the U.S. economy slowed sharply last year, but slowing growth is not the same thing as a recessionary contraction. For the economy to shrink there needs to be a significant and sustained negative shock to the system. While there have been a number of mild shocks, these have mostly been reversed, and as such I expect growth to pick up in 2012.
Among the positive trends, the nation continues to add jobs, albeit at a very weak pace. Incomes continue to grow, despite all the turmoil in recent months, and the number of job openings continues its slow climb. Exports are growing as well, fueled by strong fundamentals in Asia, Canada and Mexico. We saw acceleration in bank lending in the latter part of 2011 for commercial and industrial loans, which bodes well for business investment this year in equipment and inventory. State and local government revenues in many parts of the country have also seen growth continue at a modest pace. These improvements in revenues will finally start to offset some of the drain on the economy we’ve been experiencing.
Housing Turns a Corner
Housing prices seem to have stabilized a bit and population growth will surely help to chip away at the problem of excess supply. Most housing experts expect home construction to pick up a modest amount of speed by the end of 2012, and while the number of homes in foreclosure has leveled off, the number of seriously delinquent mortgages has been falling for over a year.
While housing has turned somewhat of a corner, the recovery will continue to be slow. It isn’t a lack of credit or the number of foreclosures that is the problem, but a lack of equity left over from the over-borrowing of the last decade. Americans use equity in their current homes to put down payments on bigger houses and pay the moving costs. This lack of equity will hamper the move-up market for years, in turn reducing the demand for new homes, particularly at the higher end.
A basic concept of personal finance is that as long as borrowers have sufficient funds for a down payment and a stable source of income, the next rungs up on the housing ladder should be within reach. For the typical American homeowner, these requirements have traditionally been satisfied by solid employment for young graduates, reasonable pricing and availability of mortgage credit, accumulation of funds that allow trade-up purchases of larger homes, and finally by the view of housing wealth as a potential income supplement during retirement.
However, a recent survey by the Metropolitan Research Centers substantiates what others have been saying for a while about the slowdown in trading up. About 38 percent of Americans want to buy or rent an attached unit, meaning a townhouse, a condo or an apartment. Thirty-seven percent of people say they want to live on a small lot (either in a small house, or a large one with meager yard space) and only 25 percent of people want to live on a large lot of more than an acre. This means that the cities of the future will need to look much different than they do today if they are going to house people where they want to live, how they want to live, and with all the other people who will need to pile in too.
But trends over the last several decades have left us with a dramatic mismatch in the coming years between demographics and housing stock. Surveys tell us one thing but the supply of homes says another. For example, only a quarter of Americans currently say they want to live on large lots, but 43 percent of them do. Only 28 percent actually live in a condo or townhouse while a lot more people want to, and only 29 percent of people live on smaller lots while millions more would like the chance. America currently has about 30 million more homes on large lots than the market demands.
Trend Many factors are converging to shift the housing markets from the traditional American cul-de-sac suburb to the newer form of suburban town center as well as to the central parts of those cities with vibrant 24/7 downtowns. First, married couples without children (including empty-nesters) will be the fastest-growing household type, followed closely by single person households. Second, the aging Baby Boomer cohort is either staying put in their suburban homes or, if and when they can, selling them and moving closer to jobs, urban amenities and grandkids.
Third, the younger Boomers already have their suburban homes (that they’ve bought from the older Boomers who have already traded down). Even if they wish to buy a new home and are able to sell their existing one, such a move does not add to the supply of suburban homes. The prime group of move up buyer for new suburban homes is Generation X, which we already know is a significantly smaller group. Their ability of younger Boomers to sell their existing homes is thus constrained by the market today and many find themselves with homes that are “underwater.” When they do move they will where there are already a sufficient supply of modestly priced suburban homes to move up to.
The challenge presented by the re-urbanization trend is that once the economy recovers and household formation resumes, the demand for urban housing will greatly outstrip the supply. This imbalance is likely to continue for the rest of the current decade and beyond.
Producing enough urban housing to meet the demand will often require infill development, which is time consuming and costly. The obstacles are well known: hard to assemble and expensive land; intense opposition to development from community leaders, over-democratized development review processes; complex and often out of date planning, zoning and building codes; and more complex and expensive construction types needed to obtain economic densities. Efforts are being made at the local level to address these problems but unless a radical and revolutionary shift occurs in thousands of localities across the country, all too many members of Gen Y and immigrants will be forced to move well away from the urban and suburban town centers they would otherwise choose were they available and affordable.
While these trends are obviously longer term in nature and will be played out over the next couple of decades, these future housing trends point to the need for growers, landscape service providers, and retailers to be prepared for these gradual changes in landscapes and interiorscapes across the United States. One thing remains critical however — it will be all the more imperative to emphasize our quality-of-life benefits so that our relevancy is not questioned by our end consumers, but embraced as part of their walkable, urban-centric neighborhood lifestyles.