Property market in US set to be strongest for a decade, real estate forum hears
Existing home sales in the United States are poised to increase by 3.5% this year as a strong employment market and improving household confidence take property activity to its highest for a decade.
But supply and affordability headwinds and modest economic growth are holding back sales and threatening to keep the nation’s low home ownership rate subdued, a real estate forum heard.
The forum heard that the first three months of 2017 recorded the best quarterly existing sales pace in a decade at 5.62 million and Lawrence Yun, chief economist of the National Association of Realtors (NAR), told the audience that he expect activity to stay on track and finish around 5.64 million, the best since 2006 when it was 6.47 million and 3.5% above 2016.
The forum also heard that with several metropolitan areas seeing hefty price growth, the national median existing home price is expected to rise around 5% this year. ‘The housing market has exceeded expectations ever since the election despite depressed inventory and higher mortgage rates,’ said Yun.
‘The combination of the stock market being at record highs, 16 million new jobs created since 2010, pent-up household formation and rising consumer confidence are giving more households the assurance and ability to purchase a home,’ he added.
Although sales are currently running at a decade high, Yun believes the healthy labour market should be generating even more activity. However, listings in the lower and middle market price range are scant and selling fast and home buyers are discovering they can afford less of what’s on the market based on their income.
‘We have been under the 50 year average of single family housing starts for 10 years now. Limited lots, labour shortages, tight construction lending and higher lumber costs are impeding the building industry’s ability to produce more single family homes. There’s little doubt first time buyer participation would improve and the home ownership rate would rise if there was simply more inventory,’ Yun explained.
Housing construction has been uneven so far this year, but Yun does anticipate starts to jump 8.4% to 1.27 million. However, this is still under the 1.5 million new homes needed to make up for the insufficient building in recent years. New single family home sales are likely to total 620,000 this year, up 8.4% from 2016.
Substantial uncertainty exists about the future direction of the housing market, according to Jonathan Spader, senior research associate at the Joint Centre for Housing Studies at Harvard University. He cited foreclosure related housing exits from older adults and delayed buying from younger households as the primary causes in the trend since the economic downturn.
He said the good news is that while there was growth in home owner households in 2016, an aging population, changes in family type and increasing diversity by race and ethnicity all pose as headwinds going forward. Spader’s 2025 projection puts the home ownership rate in a range of 61% to 65.1%.
‘Stagnant household incomes, rising rental costs, student loan debt and limited supply have all contributed to slower purchasing activity. When the home ownership rate stabilises there will be an increase in home owner households,’ said Spader.
‘Young and minority households’ ability to reach the market will play a big role in how much the actual rate can rise in coming years,’ he added.
Mark Calabria, chief economist and assistant to Vice President Mike Pence, pointed out that a strong labour market is need to drive a strong housing market, but you can’t have a strong housing market without a strong economic foundation.
‘The recovery has been uneven with roughly 70 counties making up roughly half of all job growth. The White House’s proposed plans to cut corporate and individual tax cuts will help large and small businesses grow, hire and ultimately contribute to more households buying homes as more money goes into their pockets,’ he told the audience.
Yun also pointed out that the rising interest rate environment is here to stay as the Federal Reserve slowly begins unwinding its balance sheet. He foresees two more short term rate hikes by the end of this year and for mortgage rates to average around 4.3% before gradually climbing towards 5% by the end of 2018.
‘There was a lot of uncertainty at the start of the year, but a very strong first quarter sets the stage for a modest sales increase compared to last year. However, prices are still rising too fast in many areas and are outpacing incomes. That is why housing starts need to rise to alleviate supply shortages. There will be more sales if there’s a meaningful bump in new and existing inventory,’ Yun concluded.