NAR: Low Supply, Lack of Affordability Continue to Hinder Market

A stronger economy, wage growth and an improving job market are expected to march home sales and prices higher in 2018, but low supply and weakening affordability will tamper the rate of increases, according to speakers at a residential real estate forum during the 2018 REALTORS Legislative Meetings & Trade Expo.

Lawrence Yun, chief economist of the National Association of Realtors, presented his 2018 midyear forecast and said despite headwinds, a moderate and multiyear increase in home sales is likely ahead. After accelerating 3.8% in 2016, existing home sales rose only 1.1% to 5.5 million in 2017 and are forecast to finish 2018 at a pace of around 5.6 million (up 1.8%). He projects 5.7 million sales for 2019.

“Overall fundamentals remain solid, driven by a growing economy and steady job creation, which will sustain home sales in 2018 slightly above last year’s pace,” said Yun. “The worsening housing shortage means home prices are primed to rise further this year too, hindering affordability conditions for homebuyers in markets across the country.”

Yun said the widespread shortage of homes for sale is the major factor limiting sales from being higher. While home sales have risen modestly since the start of the year, but Yun said without more supply to fully satisfy demand and alleviate the upward pressure on prices, contract activity is likely to remain flat and will more or less continue sideways through the end of the year.

Total housing inventory at the end of March was 1.67 million existing homes available for sale, which is 7.2% lower than a year ago (1.8 million). Inventory has trended down steadily for the past five years, said Yun, and the country is now experiencing the lowest inventory levels in a generation; unsold inventory is at a 3.6-month supply at the current sales pace, down from 3.8 months a year ago.

Danielle Hale, chief economist at realtor.com, noted that there is an acute shortage of inventory, particularly in affordable housing. According to realtor.com data, there are 250,000 fewer starter homes (those priced under $200,000) now than there was two years ago, in May 2015. Millennials, boomers and inventors may all be going after the same affordable inventory of homes, so competition is great said Hale.

“There is reason for optimism ahead, though,” she said. “We are starting to see new listings grow in recent months. The inventory shortage isn’t over; it took us years to get into an inventory rut, so it’s going to take us years to get out of it, but we do see signs of a turnaround.”

Home price growth, up 48% from 2011 to 2017 and likely to rise an additional 4% in 2018, is far outpacing income growth, up only 15% during the same time frame. Increased home prices on top of rising mortgage rates puts affordability at a six-year low, according to NAR’s Housing Affordability Index, and will likely continue to fall in coming months.

“Challenging affordability conditions have prevented a meaningful rise in the homeownership rate after having fallen to a 50-year low a few years ago,” said Yun. “To increase homeownership, more home construction is needed, which could be boosted by delivering regulatory relief to community banks, removing the lumber tariff, re-examining stringent zoning laws and training more workers for the construction industry.”

Photo: Danielle Hale

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