Market Forecast: Households Growing Faster Than Homes

1. What should communities do when households are growing faster than available homes?  
2. Should homes located farther from job centers come with stickers that alert homebuyers about the added costs of transportation? 
3. Will we ever find “missing” middle housing? 

These pressing questions and more were central to the discussion as part of the “Market Moves – A National and Regional Analysis of the Residential Market,” a webinar hosted by ULI Northwest Arkansas at the on March 16, 2022. 1 

National Real Estate Market Forecast 

Logan shared the results of RCLCO’s most recent quarterly sentiment survey with responses from 3,000 real estate practitioners indicating their thinking across all real estate markets in January 2022. He noted that although this survey predated the Ukraine invasion, “People are still feeling optimistic about where things are going.” 

U.S. economic growth is expected to be steady. Some of the prevailing economic trends: 

1. The possibility that the Ukraine invasion could throw Europe into recession. As Europe is a major U.S. trading partner, this could pose some risks to U.S. pandemic recovery.  
2. Impacts on energy costs as oil and gas prices shoot up 
3. Inflation that may not peak until the end of 2022 
4. COVID-19 risks 
5. Expected rise in interest rates from the Federal Reserve, although still below the long-term averages; a parallel increase in mortgage interest rates  
6. Abundant equity for real estate investment 
7. Record job growth and a competitive market 

Source: RCLCO 

Current Residential Real Estate Outlook 

According to Logan, residential real estate is expected to continue experiencing pent-up demand, but with some of the same challenges as in 2021: an undersupply of residential units (a factor for over a decade now, since the Great Recession), compounded by ongoing pandemic-influenced supply chain issues for materials.  

Existing home inventory remains relatively low, pushing more people into the new home market and helping to drive strong sales on both fronts.  

Millennials and their growing families are the biggest share of the homebuying market. Baby boomers moving into retirement are also active in the residential market.  

Low interest rates continue to be a facilitator of new home purchases—but if rates start to rise, this will have a significant impact on affordability. The persistence of work-from-home trends are also increasing demand in suburban markets away from higher-cost urban centers. 

Source: RCLCO 

Logan observed that single-family rental production has exploded in the last two years. He commented, “That’s partly a response to the lack of missing-middle housing. By and large, there is a lot of opportunity for more diverse range of housing.” 

Building permits are ticking up, although starts and completions are a bit uneven for the start of 2022.  While there has been a near term cooling trend in new home sales, average sales prices remain high and residential price growth continues to outpace wage growth. 

Fannie Mae’s February 2022 new single family home sales forecast predicts improved sales over 2021. Assumptions: continued resolution of supply chain issues, steady in the face of strong price appreciation, and interest rates staying below 4 percent.  

Focus on Northwest Arkansas 

Mervin Jebaraj transitioned to report on demographic data and real estate trends intensifying the residential market in Northwest Arkansas. He noted that even though the region’s population is growing by about 30 people daily, housing production is not keeping pace with demand. In fact, Jebaraj remarked, “The region was producing a lot more housing before the financial crisis in 2008.” 

In a housing boom not seen locally since 2006, Jebaraj reported that a record 6,000 homes sold in Northwest Arkansas in the second half of 2021.. In the latter half of 2021, about 3,700 homes sold in Benton County and 2,300 in Washington County. 

Source: CBER 

Jebaraj observed, “Having a record number of homes sold was the good news. The bad news is that home prices, on average, have risen quite significantly.” Home prices rose 18 percent in Benton County in 2021, to an average of $346,000, and 16 percent in Washington County, with an average home price of $311,000.  In both markets, there has been a 55 percent increase over a five-year time period. 

Downtown Living Fetches a Hefty Premium 

In the region’s bigger cities, average home prices skew even higher: $429,000 in Bentonville and $317,000 in Fayetteville. Bentonville, which already has some of the highest home prices in the region, is experiencing a significant premium on home prices in downtown compared to the rest of the city, with an average home price of $653,000. Downtown Fayetteville has seen a premium of about $50,000 on home sales, with an average home price of $365,000. 

According to Jebaraj, “We were the fourth best place according to the US News and World Report. For the first time, we displaced Austin, Texas.” One of the biggest contributor contributors to those rankings? The cost of living. He added, “What I don’t want us to do is follow the path of some of those cities that have really high cost of living.” 

Investors Target Low Housing Supply for High Returns 

He reported that given the tight supply of homes in the NWA market (as well as markets across the country), the region is seeing a lot more action from investors. While exact numbers on sales to investors in Northwest Arkansas are not currently available, the National Association of Realtors indicated that 22 percent of national home sales in January were to investors. 

Building more homes in the region and pushing the average prices down, Jebaraj observed, would make the market less attractive to investors. 

Fayetteville Demonstrates More Homebuilding Success  

Notably, Fayetteville’s higher rate of pre-pandemic homebuilding—which meant that more new homes were coming on the market in denser subdivisions—helped flatten the high cost of all homes being sold in the city. Although the recent, rapid increase in demand has meant that those new homes are no longer helping keep prices flat in Fayetteville, Jebaraj explained that’s the reason for a lower five-year average local home price than some of other cities in Northwest Arkansas.  

Jebaraj offered recommendations that would help decrease the cost of development, including: 

1. Eliminating downtown parking minimums that require a certain number of spots per dwelling unit.  Removing parking minimums not only decreases the cost of the development, but minimizes the amount of space needed to make that development viable.  

1. Target comprehensive code revision, rather than piecemeal efforts.  

Source: CBER 

What About Renters? 

Renters are not faring any better in the hot NWA housing market. While construction of apartments has been steady, it is not keeping pace with demand. The vacancy rate continues to go down, most recently about 3 percent in the region, which has attributed to rent increases of about 25 percent in the last five years. Lower vacancies limit consumer choice and hikes rents. 

According to Jebaraj, “I would look at the low vacancy rates as evidence that, in spite of how much we built in the multifamily market, there’s clearly significant demand. In this region, we’re just not building it.” 

Measuring the Appetite For More Housing Diversity  

RCLCO has done some consumer research to evaluate demand for other forms of housing besides single family or conventional apartments. Logan explained, “The short answer is, while we see a lot of demand for single family, we do see more demand for broader diversity of housing than we’re actually building.” 

Jebaraj added, “We’ve invested as a region in all these nice amenities: museums, restaurants, bars, and bicycle trails. But, they’re not outside the cities—they’re in the cities. I think we’ve talked endlessly in this region about building this missing middle housing. It’s just time to build the missing middle housing and stop talking about it.”  

Source: MissingMiddleHousing.com 

Agricultural Conversion 

Craiglow asked the panelists: “What are we doing to make sure that agriculture remains an effective part of the Northwest Arkansas economy, while supporting development?” 

Logan observed that we often assume that agriculture is simply pristine green fields that should be preserved for open space. “But it’s not,” he countered. “Agriculture is a business, and it’s industrial.” 

Jebaraj noted that agricultural and ranching land has been displaced already in NWA. Despite the growth of interest in locally grown food, in the current patterns of development, we are pushing our food further and further away from where we live today. 

Craiglow encouraged learning more about the highly regarded farmland preservation programs Fayette and Lexington counties in central Kentucky.  

 Source: Kentucky.com 

Facilitating Conversations with Education and Advocacy 

Panelists agreed that education and advocacy are important to facilitate conversations about the needs of this region. Both for city councils and the general public, it’s important to know what the needs are and how best to address them.  

 “There is a lot of misperception about what growth means to region,” Jebaraj explained. “There’s no stable middle: either you’re growing, or you’re not growing. We do not want to be in the ‘not growing’ category. What we need to do as a region is obviously mentor growth in a sustainable way.” 

Logan observed that education can be very helpful for zoning and planning commissioners, as well as city council members, noting that ULI does a great job as an educational organization. 

Housing and Transportation Costs 

Given the premium often attributed to downtown housing costs, people often move further away to find a home they can afford. The missing part of this equation? The cost of transportation. Yet, the connection between transportation and housing costs should not be ignored. 

Craiglow raised the topic of Centerton, a city in Benton County. Located west of Bentonville on Highway 102, Centerton has transformed from an early 20th century rural railroad stop into a suburban Northwest Arkansas bedroom community. The city’s population exploded from 491 in 1990 to 16,244 in 2019. Craiglow wondered if Centerton would continue its extraordinary growth. 

Jebaraj responded that Centerton’s growth is also reflected in the impacts on the region’s worsening traffic congestion. He commented, “We talk about regional commute times. That’s going to become a real problem in terms of transportation infrastructure here and the associated costs. That should not be the case.” 

Jebaraj joked that just as cars come with stickers that show mileage and efficiency, houses should also come with stickers that show transportation costs.  

Logan observed, “People will drive further to find that affordable house and now they’re the ones in front of you, creating traffic on your way to work.” 

Craiglow agreed, noting “The math matters.” 

Political Will and a Lot of Courage 

As the webinar wrapped up, Craiglow noted that bold moves in the housing market are going to require political will, a lot of courage, and recognizing that current residents have a vote that that will that will impact future residents.  

He concluded, “Everything in the built environment is a choice. Someone is making that choice for you and it’s impacting your life in one way or the other. It’s time to get involved in the decision-making process, because every brick in your city started with a decision—and those impact you.” 

 To access the full Market Forecast video, click here. 

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This event is part of the year-long “Aligned for Affordability” initiative hosted by ULI Northwest Arkansas, aimed at understanding our region’s housing market, identifying constraints to housing production in varying forms and locales, and advancing policy recommendations that ensure lasting affordability and vibrant neighborhoods to the working families of Northwest Arkansas.  

Deborah L. Myerson, AICP, is a housing and community development consultant based in Bloomington, Indiana.