Costs and prices are in flux.
They tower in our minds among the material issues of the moment in home building and residential development.
Worries are that their relationship to households’ fundamental capacity to pay them is getting stretched and stressed to the limits of tolerance. And beyond.
Given residential real estate’s singular propensity to invest in long-term returns on capital tied to short-term debt obligations, cost and price risk are existential matters.
They can make or break companies, households, municipalities, states, and more.
In our momentum-juiced economic recovery, more jobs mean more incomes, more wage earners, but that’s been slow to translate into more income.
Here’s an example–one of many available–of the rapid rate of increase on the cost side for people who are paying for, or who want to pay for homeownership. Of course this rate of increase eclipses the rate of change in income during the same time period, causing the worry.
A consensus forecast[1] suggests mortgage rates will rise by about 0.36 percentage points between June 2018 and June 2019. The CoreLogic HPI Forecast suggests the median sale price will rise 2.2 percent in real terms over that same period (or 4.7 percent in nominal terms). Based on these projections, the inflation-adjusted typical monthly mortgage payment would rise from $955 in June 2018 to $1,018 by June 2019, a 6.5 percent year-over-year gain (Figure 1). In nominal terms the typical mortgage payment’s year-over-year gain would be 9.2 percent.
An IHS Markit forecast calls for real disposable income to rise by less than 3 percent over the next year, meaning homebuyers would see a larger chunk of their incomes devoted to mortgage payments.
When adjusted for inflation[2] the typical mortgage payment puts homebuyers’ current costs in the proper historical context. Figure 2 shows that while the inflation-adjusted typical mortgage payment has trended higher in recent years, in June 2018 it remained 25.3 percent below the all-time peak of $1,279 in June 2006. That’s because the average mortgage rate back in June 2006 was about 6.7 percent, compared with an average rate of about 4.6 percent in June 2018, and the inflation-adjusted U.S. median sale price in June 2006 was $248,312 (or $199,750 in 2006 dollars), compared with a June 2018 median of $233,732.
As much as affordability–and spiraling challenges to achieve it in a minefield of volatile and rising costs–matters as a central issue today, there’s another area clamoring for attention, for brilliance, and for action.
A reframing of the story of value.
Think for a moment of an analogue. The Gross Domestic Product has an increasingly difficult time of it measuring economic output in a more and more service-based economy.
The benefits of many new products are simply not picked up at all. The upfront costs of providing services on a digital platform, such as Facebook or Twitter, are hefty. But the marginal cost is close to zero, and the explicit price to users is normally nothing. By global convention, zero-priced goods are excluded from GDP. So are all voluntary forms of digital production, such as Wikipedia and open-source computer programs. Some of this unpaid-for activity can be picked up in the accounting; although there is no charge for a Google search, consumers pay a shadow price by supplying information and attention, for which advertisers pay. But the advertising revenue is likely to be well below the benefits that consumers get.
Now, let’s think about new homes today.
Measures of value to homeowners include the real estate, of course, and the relative aesthetic, utility, and durability aspects that are essentials to structural value.
However, today’s new homes bake in tangible and intangible benefits to the homeowner–connectivity, adaptability, health and sanctuary functionality and attributes, privacy and safety tools, etc., that are increasingly baseline offerings in new homes today.
These benefits–both tangible and intangible–put residential developers and builders in a business that connects with human beings’ most primal basic instincts as hunters and gatherers, giving them a sense of efficacy and well-being.
The challenge for the business community leading into the 2020s feels very much like it’s all about runaway costs. But the opportunity during the same timeframe may be in focusing on how much more of what people want and need in their lives is right there at home and in their community. Batteries included.
We may need to get away from long-held assumptions that home costs should comprise 25% to 30% of monthly take-home pay. If a home includes benefits like entertainment, health and well-being components, connectivity, and safety, then that baseline may need to change.
