Kenneth Perlman has some reassurance for people in the housing industry fretting that a huge recession is looming: “We will be just fine.”
Speaking in Salt Lake City, Perlman, principal at John Burns Real Estate Consulting, said that “the thing we have to have here is perspective.” Housing may have its troubles in the next few years, but they will not echo what they were a little more than a decade ago.
“From 2007 and 2008 and what we’re talking about here, is not the same thing,” he said at the ULI (Urban Land Institute) Utah’s “Trends 2019” conference, adding that the overall U.S. market is under-built and long-term demographics are “fantastic.”
Perlman said a national survey of economists revealed that about half expect an economic recession during the next two years — typically the figure sits at about 27 percent — and about two-thirds foresee it within the next four years, up from the typical 56 percent.
Eschewing the word “recession” in favor of “downturn” or “hiccup,” he described the past 47 years in housing as having four “big downturns” and three “hiccups.”
“We’re sticking with our thesis that the next housing recession will be a hiccup more so than a downturn,” Perlman said. “Distance yourself from 2007.”
“The bottom line here is, you can have a recession where housing tanks or you can have one where housing is just a little bit of a hiccup. … Look for some slowing in 2020 and 2021, but look for it to be very mild, with another upturn in 2022. Affordability is really the issue.”
Perlman said growth in the number of single-family residential permits in the U.S. likely will be 8 percent between 2017 and 2019, with a flattening in 2020 and a 7 percent decline in 2021. However, the 2021 projection of 830,000 permits “is about what we’ve been running at for the last 12 months,” he said. “If you were OK in 2016 and you were OK in 2017, then you’re going to be OK in 2020 and 2021, OK?”
In Salt Lake and Tooele counties, he projects single-family residential permits to total about 5,400 in 2019, with softening in 2020 and a figure of about 4,700 in 2021. “That 2021 number is still more than you guys did in 2016 and almost what you did in 2017,” he said.
Prices likely will rise about 5 percent between now and 2020 in those counties as well as the Provo-Orem area. “You guys will be fine if you’re OK with what you guys were doing in 2016 and 2017,” he said.
Nationally, housing just had its worst October in years. Sales were down 13 percent from October 2013. “We are in a little bit of a spot where we are starting to see some slowing in the housing market,” he said. Sales in October were down from a year ago, but October 2017 had “phenomenal” sales, he said.
“It seems slower, it feels slower, it is slower, but have a little perspective on where the market is. It’s not as bad as we’re making it out to be,” Perlman said.
In the long term, housing has a couple of tailwinds. One is that inventory levels are low, with little excess anywhere in the U.S. “I think that the story here is that we don’t see excess supply, particularly in this market,” he said, with about a three-month resale supply in Salt Lake and Tooele counties and 2.7 months in Provo.
Another is demographics. Lots of people born in the 1960s are retiring — “an explosion of retirees” expected to continue for another decade, he said — with many baby boomers expected to move into assisted-living facilities, and there are 44 million people born in each of the 1980s and 1990s that will be looking for housing.
“You want to talk about big demographic tailwinds? You want to talk about why we are bullish on the housing market for the long term? That’s why right now. You’ve got a huge population wave of homebuyers coming into this market,” he said.
Meanwhile, Utah has a relatively large number of established families in their peak earning years, with many coming in from outside the state.
“You have some really young families coming into this pipeline — much higher than the nation as a whole,” he said. One-fourth of the population consists of young retirees. Thirty percent of the buying population is fairly young, active adults. “If I were looking at how to draw up demographics for a housing market, it would look a lot like this,” Perlman said, calling the local demographics “fantastic for housing.”
While the Salt Lake metro area had 4,700 single-family building permits issued in 1993, the figure rose only to 4,800 in 2017. “Your population has gone up 46 percent in that amount of time,” he said. “We are not overbuilding the market. We’ve cleared a lot of that excess supply. We’ve got a lot of those demographics coming through the market. That’s why we’re bullish on the housing market.”
However, affordability in the Salt Lake City market “is brutally tough,” he said.
“We’re getting the point where we are having some critical concerns about affordability, and when you start to look at the possibility of a housing market slowdown or adjustments in the market, that’s the biggest threat that we see and the biggest risk that we see in the market.” He suggested that Utah housing industry stakeholders “start thinking about building different types of product.”
The national housing industry is being buoyed by a “really healthy” economy, increased consumer confidence, 10 million more people employed than in 2008, small-business hiring, a low unemployment rate, growing wages and improving mortgage availability, he said.
“What I want to let you know is, demand is very, very good. Supply is very, very low. Affordability is very, very challenging,” Perlman said. “We are approaching the end of the [economic] cycle. Look for a hiccup, not a recession. We will be just fine.”