1. Economic Headwinds and Policy Concerns for New Home Construction Robert Dietz, Ph.D. Vice President Tax and Market Analysis NAHB Economics December 18, 2014 REALTOR® University Lecture Series

2. Macroeconomic Conditions and Housing Supply Side Headwinds Forecasts Policy Wild Cards Long-Run Optimism for Housing

3. Real GDP Growth Economy returns to growth after Q1 ‘14 blip Annual Growth 2013 2.2% 2014 f 2.3%

4. Payroll Employment US has returned to pre-recession peak, will surpass trend by 2016 Trend in US Employment Total US Employment Millions -7%

5. Shift in Total Home Sales New share went from 20% to 10% 2001-2007 average 5.6 million sales/yr 2013 4.1 million sales Source: AHS

6. Industry Headwinds The 3 Ls (and 1M)

7. Labor Supply A leading challenge for builders Starts (000s) Low Supply

8. Lot Supply Shortage indicators rise and fall with level of starts, except recently

9. AD&C Access Tight…

10. AD&C Access …But Easing Better Worse *SLOS – Senior Loan Officer Survey

11. Building Material Prices Builders Reporting Increases in Last 6 Months

12. Forecasts

13. Remodeling Market Index (RMI) At or above 50 for most of last two years

14. Residential Remodeling Billions 2009 $, SAAR Actual Adjusted

15. NAHB Multifamily Housing Production Index & 5+ Housing Starts (000s)

16. NAHB Multifamily Vacancy Index & Census Vacancy Rate NAHB MVI (L) Vacancy Rate (R)

17. 1995-2003331,000 ”Normal” 2011178,000 2012247,00039% 2013309,00025% 2014352,00014% Multifamily Housing Starts Healthy Response from Growth in Renters Trough to Current: 4 th Q 09 = 82,000 3 rd Q 14 = 379,000 +362% 2014Q3: 111% of “Normal”

18. NAHB/Wells Fargo Housing Market Index Builder sentiment has recovered from recession depth, early 2014 weather Single-family starts (R) NAHB HMI (L)

19. Single-Family Starts – Continuing to recover Trough to Current: Mar 09 = 353,000 Oct 14 = 696,000 +97% 2014Q3: 49% of “Normal” 2016Q4: 90% 2000-20031,343,000 ”Normal” 2011434,000 2012537,00024% 2013621,00016% 2014641,0003%

20. Policy Challenges The Three Rs

21. Housing Finance Reform A healthy secondary mortgage market Current system is unsustainable Private capital and a federal backstop needed What impacts will this have on mortgage access?

22. Tax Reform Business-only or comprehensive? “Corporate” reform could have major impacts on real estate LIHTC Like-kind exchange Pass-thru rules Depreciation Business interest deductions Tax Rates

23. Tax Reform Comprehensive – Everything is on the table Mortgage Interest Deduction Direct Cuts Principal Caps Second Homes Home Equity Loans (Remodeling)

25. Tax Reform Comprehensive – Everything is on the table Mortgage Interest Deduction Direct Cuts Principal Caps Second Homes Home Equity Loans (Remodeling) Indirect Cuts Schedule A impacts How Many Itemize?

26. Tax Reform Comprehensive – Everything is on the table Mortgage Interest Deduction Property Tax Deduction Capital Gain Exclusion Individual Rates GDP growth Dynamic scoring (macro analysis) Housing vs Business Investment

27. Positive Long-Run Outlook for Housing

28. Household Formations – Still Weak Thousands Avg: 1.4 million (12% renters) Avg: 0.5 million (130% renters ) Avg: 0.6 million (123% renters)

29. Population by Single-Year of Age Rising population in prime household formation years Millions Born 1979 or later Born 1965-78 Born 1946-64 Born 1945 or earlier Headship rates increase from 16% to 48%

30. Total Housing Starts Expected to normalize by second half of decade Millions

31. Questions eyeonhousing.org rdietz@nahb.org @dietz_econ