So far this year, the housing market has been hampered by negative factors such as weather, higher mortgage rates and prices, shortage of properties for sale and tight lending practices. Even so, the housing market continues to grow. The outlook for 2014 is good — not only for residential but for the real estate industry as a whole.
Regarding residential properties, experts predict smaller price increases this year. Their best guess is that prices will be up but not as much as last year. Some surveys show consumers expect to pay 3 percent more each year for the next ten years. In other words, home prices will likely increase less than mortgage rates, indicating that the consumption motive to purchase a house is stronger than the investment one. Also, the futures markets have home price increases at 5 percent annually. Experts see a continued buyer preference for rentals because household formation has been slowed by unemployment.
The effect institutional investors have on home price increases is comparable to the homebuyer tax credit. Any long-run, permanent effects they have are unclear. Institutional investors are perceived as having a temporary effect on home prices. Purchasing decisions are made based on profit and return; single-family homes do not represent the same cost structure as apartment buildings to maintain and service. As home prices and interest rates increase, profitability decreases for institutional investors. Given this, the long-run market potential for 1.7 to 1.8 million housing starts per year is still years away.
For the commercial sector, private nonresidential construction has picked up since the recession ended. While commercial builders saw a strong decline during the recession, construction has begun to pick up again. Experts see growth throughout the private, nonresidential construction sectors.
Retail construction remains muted because of a lack of growth in consumer spending and an increase in consumer preference for online purchases.
In contrast, hotel construction has picked up largely because of a boost in corporate profits, which has fueled business travel. Hotel construction is particularly cyclical, and it closely follows the pattern of real gross domestic growth and corporate profits.
The outlook for industrial construction growth remains uncertain. Institutional construction has seen a volatile recovery after a 2013 decline precipitated by a lack of funding at the federal, state and local government levels.
After a muted 2013, office construction has picked up, driven by employment growth in the energy and technology sectors. More jobs means more demand for office space in regions with a strong energy-technology presence.
Workplace density is increasing and will have an impact in future building construction. In 2010, the average space per office worker globally was approximately 225 square feet. By 2013, 64 percent of global corporations were at 150 square feet or less space. By 2018, it is expected that 52.3 percent of global corporations will be at 100 square feet or less. That’s because the most effective way for companies to lower costs is to increase density.
Real estate sector analysts have expressed concerns about the shortages in the supply of skilled labor to build houses, and commercial and office buildings. The shortage is said to have been caused by an older construction labor force, a movement to other industries, less immigration labor and a generational problem in training and recruiting young workers.
As long as the economy continues generating slow job growth, the real estate sector will continue to grow at a slow pace. Job growth is needed to increase household formation as the hiring of new workers leads to greater demand for housing and commercial and office space. This has been the case for Texas where metropolitan areas, such as Houston and Austin, continue to show the strongest performance in real estate markets versus other regions that lack energy and technology industries.
Source: Luis Torres, Real Estate Center at Texas A&M University