New Construction is Key to America's Housing Shortage, According to Chief Economist Lawrence Yun

Posted by West + Main Homes on Wednesday, August 29th, 2018 at 7:02am.

Nearly a decade after the Great Recession, Lawrence Yun, chief economist for the National Association of REALTORS® (NAR), says concerns that the housing market has peaked and is headed toward another slowdown are purely speculative, regardless of recent sales declines in some regions.

What’s in store for the future? Markets should slow down; however, this is due in part to insufficient supply and swiftly rising home prices instead of weak buyer demand. Yun predicts existing-home sales will drop 1 percent to 5.46 million in 2018 (down from 5.51 million in 2017). Home price growth, however, should remain strong, increasing an estimated 5 percent nationwide. And with an anticipated hike in inventory supply come 2019, home sales should stay afloat—existing home sales are predicted to rise 2 percent with home prices estimated to increase by 3.5 percent, according to Yun.

“Over the past 10 years, prudent policy reforms and consumer protections have strengthened lending standards and eliminated loose credit, as evidenced by the higher than normal credit scores of those who are able to obtain a mortgage and near record-low defaults and foreclosures, which contributed to the last recession. Today, even as mortgage rates begin to increase and home sales decline in some markets, the most significant challenges facing the housing market stem from insufficient inventory and accompanying unsustainable home price increases,” said Yun in a statement.

Low inventory levels, which have fallen for three consecutive years, along with bidding wars, are prevalent across the country. And while homebuilding has jumped 7.2 percent year-to-date to July, Yun says new construction is sorely needed to continue filling the gap. Carefully considered policy decisions should help alleviate the shortage.

“The answer is to encourage builders to increase supply, and there is a good probability for solid home sales growth once the supply issue is addressed,” Yun said. “Additional inventory will also help contain rapid home price growth and open up the market to perspective homebuyers who are consequently—and increasingly—being priced out. In the end, slower price growth is healthier price growth.”

“Rising material costs and labor shortages do not help builders to be excited about business,” added Yun. “But the lumber tariff is a pure, unforced policy error that raises costs and limits job creations and more home building.”

In the meantime, prices keep going up...

U.S. home prices continue to surge according to the latest S&P CoreLogic/Case-Shiller Indices, which found June prices on an upward trend (at 6.2 percent year-over-year), inciting affordability concerns.

“Home prices continue to rise across the U.S.” said David M. Blitzer, managing director and chairman of the Index Committee at S&P Dow Jones Indices. “However, even as home prices keep climbing, we are seeing signs that growth is easing in the housing market. Sales of both new and existing homes are roughly flat over the last six months amidst news stories of an increase in the number of homes for sale in some market. Rising mortgage rates—30-year fixed-rate mortgages rose from 4 percent to 4.5 percent since January—and the rise in home prices are affecting housing affordability.”

The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index’s 10-City Composite, which is an average of 10 metros (Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, New York, San Diego, San Francisco and Washington, D.C.), rose 6 percent year-over-year in June, a decrease from 6.2 percent in May. The 20-City Composite—which is an average of the 10 metros in the 10-City Composite, plus Atlanta, Charlotte, Cleveland, Dallas, Detroit, Minneapolis, Phoenix, Portland, Seattle and Tampa—rose 6.3 percent year-over-year in June, down from 6.5 percent in May. Month-over-month, both the 10-City Composite and the 20-City Composite rose, 0.4 percent and 0.5 percent, respectively.

“The west still leads the rise in home prices with Las Vegas displacing Seattle as the market with the fastest price increase. Population and employment growth often drive home prices. Las Vegas is among the fastest growing U.S. cities based on both employment and population, with its unemployment rate dropping below the national average in the last year,” said Blitzer. “The northeast and mid-west are seeing smaller home price increases. Washington, Chicago and New York City showed the three slowest annual price gains among the 20 cities covered.”

The complete data for the 20 markets measured by S&P:

Atlanta, Ga.
Month-Over-Month (MoM): 0.7 %
Year-Over-Year (YoY): 5.7%

Boston, Mass.
MoM: 0.9%
YoY: 7.1%

Charlotte, N.C.
MoM: 0.6%
YoY: 5.7%

Chicago, Ill.
MoM: 0.8%
YoY: 3.3%

Cleveland, Ohio
MoM: 1%
YoY: 5.1%

Dallas, Texas
MoM: 0.4%
YoY: 5.2%

Denver, Colo.
MoM: 0.6%
YoY: 8.3%

Detroit, Mich.
MoM: 1%
YoY: 6.4%

Las Vegas, Nev.
MoM: 1.4%
YoY: 13%

Los Angeles, Calif.
MoM: 1.4%
YoY: 7.4%

Miami, Fla.
MoM: .7%
YoY: 5.2%

Minneapolis, Minn.
MoM: 1%
YoY: 6.4%

New York, N.Y.
MoM: -0.1%
YoY: 3.8%

Phoenix, Ariz.
MoM: 0.7%
YoY: 7.2%

Portland, Ore.
MoM: 0.7%
YoY: 5.8%

San Diego, Calif.
MoM: 0.5%
YoY: 6.9%

San Francisco, Calif.
MoM: 0.5%
YoY: 10.7%

Seattle, Wash.
MoM: 0.7%
YoY: 12.8%

Tampa, Fla.
MoM: 0.6%
YoY: 6.9%

Washington, D.C.
MoM: 0.5%
YoY: 2.9%

For more information, visit www.nar.realtor.

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