Fall 2006 issue of Horizons

INDUSTRY REAL ESTATE Real Estate Industry Outlook

continued

both the price of other raw materials and the cost of running the machinery necessary for construction. Consequently, as the cost of construction increases, the cost of new apartment projects and single-family homes increase proportionally. Third, an increase in the price of gasoline limits the average household's available spending income. When a greater proportion of a consumer's budget is allocat- ed toward gasoline, the household will have less money to spend on mortgage payments and might consider renting. Furthermore, continued high gasoline prices may continue to increase movement toward urban communities, encouraging rental of multi-family apartments. Mortgage interest rates have increased from 2005 to 2006 and are projected to continue rising. Contrary to recent years, these increasing interest rates, along with an increase in home prices, are making home ownership less affordable for many families. The national unemployment rate over the past year has decreased, falling from 5.1 percent in May 2005 to 4.6 per- cent in May 2006. Many economists believe that the unem- ployment rate is negatively correlated to housing prices. As the unemployment rate falls, housing prices rise. Consequently, although the number of available jobs

increases and more people are bringing home paychecks, the housing prices increase as well, making single-family homes less affordable. Moreover, industry experts are pre- dicting a national employment growth of 2 percent in 2006, up from a 1.6 percent growth in 2005. As oil prices, mortgage rates and employment continue to show increases, home ownership becomes a less viable option for many households. According to the National Association of Realtors, the housing affordability index reached a 13-year low at the end of 2005. In the past 12 months alone, house prices have risen 10-15 percent. There is an ever-increasing number of middle- and low-income families who are being priced out of the areas in which they live. According to “The State of the Nation's Housing: 2005,” a report by Harvard University's Joint Center for Housing Studies, the number of middle-income households with severe housing cost burden - those that spend more than 50 percent of their income on housing - increased by nearly 1 million between 2000 and 2003. More than one in eight U.S. households fall into this category, according to the report, and nearly one in three spends more than 30 percent of its income on housing. These statistics indicate that families may start turning to multi-family rentals as the practical alter- native, thus creating a greater demand for multi-family housing.

57 • summer 2006 issue