Real estate usually makes up 15%-18% of America’s GDP. This number is broken down into 3%-5% from “Residential Investment” and 12%-13% from “Consumption Spending on Housing Services”. There is no doubt that this industry is an integral part of our economy, which is why it can be used as an indicator for the economy as a whole. In 2008, the industry completely collapsed, with home values sharply declining after the subprime mortgage crisis. For years after this collapse, new construction rates were cut in half and the future of the industry looked bleak. In 2007, 776,000 new houses were sold. By 2011, this number had dropped to 306,000 new houses. But have prices followed this trend?
This FRED graph shows the Housing Price Index. Clearly, prices collapsed along with new construction rates, but prices are now above their previous highs. Because of this strong price growth, some speculate that the industry is over producing and that supply is now outpacing demand. This speculation is hit and miss, because real estate as a whole looks pretty good, but some markets are definitely becoming saturated. A prime example of this is Salt Lake City. SLC has gone through extreme growth in construction and prices, while vacancy rates have dropped to an all time low. Because SLC’s market has been so promising, developers have loaded the pipeline for new constructions. According to Colliers International, SLC’s new supply will outpace demand by the end of 2017. So by mid 2018 we will most likely see prices drop and vacancy increase. Since 2011, the hotspots for real estate have been mostly located in the south, in warmer climates, and in harbor cities. Primary markets have had prohibitively high pricing, which explains why many firms and families are relocating to cities like: Tampa, Orlando, San Fran, San Jose, Seattle, Houston, etc. The following infographic gives a good outlook of relative prices by region.
Within the next few years, cities with low rents and home values will experience growth, while primary markets will remain low growth/ high price. As you can see from the infographic, most of the locations that I mentioned are in a lighter shade (lower price). In today’s technological environment, service based companies can operate from pretty much anywhere. Firms are capitalizing on this advantage by relocating to states like Indiana. For example, Salesforce.com, a growing tech behemoth, recently moved to downtown Indianapolis. Indy rents are less than half of comparable rents in NYC, so why not move there? Firms relocating to these low-rent cities will be the main driver of real estate in the coming years. Their employees will need housing, which will boost new construction rates and increase housing prices. Secondary market growth and primary market stability in the real estate industry will expand our economy as long as the US continues to add new jobs.