No Housing Recession Over Horizon
Thursday, August 9, 2018
Through the first half of 2018, existing-home sales are down just a tad, by 2.2%, while new home sales are up 7.4%. Home prices continue to move higher by 5%. Distressed property sales have fallen to historic lows, comprising only 3% of total sales in recent months. The one area of concern is increasing housing unaffordability.
Yet even with higher mortgage rates and higher home prices, the homeownership rate has been inching higher. After touching a cyclical low of a 63% ownership rate in late 2015, the rate increased to 64.4% in the second quarter of 2018 as three million additional households became homeowners in this time, bringing the total to 77.9 million. The total number of renter households has remained roughly the same at 43 million for the past three years.
With rising home prices and more homeowners, the aggregate owners’ equity in real estate is projected to grow by $1.4 trillion this year. That gain would bring the net housing equity (home value minus mortgage outstanding) to over $15 trillion. Considering it had been only $6 trillion a decade ago at the depths of the housing market downturn, the overall picture of the housing market is quite impressive.
Despite the mostly good trends, worries are developing as to whether or not the housing market has peaked and is ready for a slide. How steep and how fast? After all, existing-home sales have fallen every month in June, save one. Additionally, housing starts, traditionally a good leading indicator of potential economic recession, tumbled 12% in June from the prior month. Moreover, many Americans have painful, lingering memories of the home price crash, rising foreclosures, and 10 million net job losses from the housing market bust a decade ago. Naturally, they want to know if there is even a remote possibility of a housing downturn.
As Mark Twain is supposed to have said: There are lies, damn lies, and statistics. P.T. Barnum remarked there is a sucker born every minute, after witnessing so many eager to believe in circus tricks. In short, it is possible to deduce conclusions incorrectly, or be hypersensitive to small matters.
The statistics on home sales are indeed showing muted growth. As mentioned above, existing-home sales, which make up the bulk of all sales, are down. However, is 2% a meaningful decline, and why is it declining? REALTORS across the country have broadly stated that limited housing inventory is hindering home sales. Inventory levels have fallen for three straight years and for eight of the past 10 years.
From an oversupply condition of 12 months of supply at the depth of the housing market crash, it now would take only 4.3 months to exhaust total inventory at the current sales pace. A balanced market would be 6 to 7 months of inventory. Moreover, homes that are being listed are scooped up at an incredibly swift pace, with the typical days-on-market at 26 days in June, matching the fastest pace in over a generation. Multiple bidding is still prevalent on starter homes in many markets across the country. In short, the demand is there, but the supply is not.
The lack of supply and the accompanying home prices quickly rising are the sources of market headaches. However, the supply shortage is a much better problem to have, compared to a demand shortage. The current problem also portends no meaningful price decline nor an impending foreclosure crisis. Rather, there is a good possibility for solid home sales growth once the supply issue is steadily addressed.
An illustrative example of how the market will play out is to look at two of the hottest markets in the country: Denver and Seattle. Both of these markets are said to be shifting and slowing, from being super-hot to now just hot without the superlative. The supply is less than two months in Denver and Seattle, and sales are falling. It is not because the buyers are retreating, but because there just is not enough inventory and people are consequently being increasingly priced out.
Home prices in both markets have grown at around 10% for each of the past five years. That is an exceptionally fast price gain, leading to homeowners smiling from ear to ear. The labor market is very solid in both cities with 2.8% job growth rate in Denver and 3.0% in Seattle. The national job growth rate is 1.6%. Yet not enough homes were built. However, if more homes are built and more inventory is introduced, then home prices will not go out of bounds and thereby provide some chance of homeownership to many of the new workers in these two strong local economies.
As to new homebuilding activity, housing starts did fall by a double-digit percentage in June, as mentioned above, but are up 7.8% year-to-date to June. More will need to be built, as there is still a shortage. As more homes are built, an additional boost will be provided to the local economy along with more local job creations.
So let’s not get carried away with one month of decline in housing starts, data known to be volatile from one month to the next. Let’s instead focus on the long trend and what is needed. Housing starts grew for the eighth straight year and are easily on track for another gain in 2019. Even so, the total housing starts projection of 1.3 million units this year is insufficient. Growth will surely continue for a few additional years. This growth likelihood will bring about more inventory and moderating home prices. Homebuyers are ready to pounce once affordability improves.
What can be done to speed up the supply? Here is one thing that will not: Rising material costs do not help builders to be excited about business. The lumber tariff is a pure, unforced policy error that limits job creations associated with more homebuilding.
Another item for consideration is the supply of labor. Not everyone should be college bound and bear the cost of student debt. More emphasis should be placed on vocational training: carpentry, plumbing, electrical works, and such for those not as academically inclined. Perhaps a program in Tennessee could be propagated to more states: a program that offers free vocational training to anyone who is laid off.
Other supply measures at local levels are also critical. Consider repurposing declining commercial buildings, such as turning empty shopping malls into residential condominium units, or making it easier to rehabilitate a property. An overly stringent permitting process with high impact fees on homebuilders also holds back supply. Turn NIMBY into YIMBY (Yes in my backyard) by providing financial incentives such as one year of property tax relief to those neighbors affected by new developments.
Finally, since the word “bubble” is on the minds of many consumers, it is worth laying out why today’s conditions are fundamentally different compared to a decade ago. Back then, lending standards were non-existent, with subprime loans everywhere. By contrast, the lending standards today are still stringent, as evidenced by the higher than normal credit scores of those who are able to obtain a mortgage. That is why mortgage default and foreclosure rates are at historic lows. On the supply side, there was overbuilding with 2.1 million housing starts during the bubble years. Today, we are just scratching 1.3 million.
Though no one can know the future, the likelihood of a nationwide home price collapse is near nil for the foreseeable future. My forecast over the near term is that housing starts will rise 8% in 2018 and another 8% in 2019. More homebuilding directly leads to higher new home sales, which will rise similarly. Existing home sales will fall 1% in 2018 but then rise 2% in 2019 as more inventory shows up from more homebuilding. The national median home price will rise 5% this year, followed by a more moderate 3% in 2019.
Laurence Yun is chief economist of National Association of REALTORS. He regularly provides commentary and outlook about real estate market conditions to the 1.1 million REALTOR members across the country.