Activity in US housing market subdued at beginning of 2018 due to supply issues

Pending home sales in the United States increased slightly in December for the third consecutive month with a rise of 0.5%, according to the latest index from realtors.

However, the National Association of Realtors (NAR) is warning that in 2018, home sales and price growth are forecast to moderate, primarily because of a new tax law’s expected impact in high cost housing markets.

The market continues to be held back by low supply levels, according to Lawrence Yun, NAR chief economist. He pointed out that even although pending sales are at their highest level since last March activity growth is modest.

It means that the housing market has only a small amount of momentum at the start of 2018 even though jobs are plentiful, wages are finally climbing and the prospect of higher mortgage rates are encouraging more aspiring buyers to begin their search for a home now.

‘Sadly, these positive indicators may not lead to a stronger sales pace. Buyers throughout the country continue to be hamstrung by record low supply levels that are pushing up prices, especially at the lower end of the market,’ Yun added.

The uninterrupted supply and demand imbalances throughout the country fuelled price appreciation to 5.85 in 2017, which was the sixth straight year of gains at or above 5%.

While tight inventories are still expected to put upward pressure on prices in most areas this year, Yun expects overall price growth to shrink, with some states even experiencing a decline, because of the negative effect the changes to the mortgage interest deduction and state and local deductions under the new tax law.

‘In the short term, the larger pay checks most households will see from the tax cuts may give prospective buyers the ability to save for a larger down payment this year, and the healthy labour economy and job market will continue to boost demand. However, there’s no doubt the nation’s most expensive markets with high property taxes are going to be adversely impacted by the tax law,’ Yun explained.

‘Just how severe is still uncertain, but with home ownership now less incentivised in the tax code, sellers in the upper end of the market may have to adjust their price expectations if they want to trade down or move to less expensive areas. This could in turn lead to both a decrease in sales and home values,’ he added.

After increasing 1.1% in 2017 to 5.51 million, Yun does anticipate a slight increase of 0.5% in existing sales this year. Single family housing starts are forecast to jump 13.3% which will push new home sales up 15.3%.

A breakdown of the figures show that sales fell by 5.1% in the Northeast and they are now 2.7% below a year ago while in the Midwest they fell 0.3% but are still 0.3% higher than December 2016.

Pending home sales in the South were up by 2.6% and are now 4% higher than last December while sales in the West rose 1.5% but are still 3.1% below a year ago.