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Housing Market’s Spring Selling Season Faces Pressures from Affordability, Low Inventory

Despite higher mortgage rate and prices, demand is strong for available homes.

Going in to the important spring selling season, forces that have been shaping the nation’s housing market for the past few years remain in place: Namely lack of available supply for those home buyers entering the market and higher prices.

Economists say housing construction continues to lag demand as builders primarily focused on more expensive homes during the U.S. economy’s recovery. The sales pace of those homes may likely fall if more buyers become concerned that changes that limit the deduction on state and local taxes to $10,000 make owning those homes more expensive.

While residential construction activity was somewhat consistent during the years of the recovery, it hasn’t been anywhere near the pace it had been during the housing market’s runup in 2004 through 2006. Private residential fixed investment peaked in 2006 at 6.5% of the nation’s gross domestic product (GDP). That figure has hovered at 3.0% or higher since 2013, reaching 3.9% of GDP during 2017, according to figures from the U.S. Bureau of Economic Analysis and the Federal Reserve Bank of St. Louis.

It’s probably a good thing that construction activity in the housing market isn’t anywhere near what it was during the housing bubble. Yet, these days, the lack of available inventory, as well as higher prices and mortgage rates present the market with some considerable headwinds. The overall number of homes for sales in February declined by 11.4%, according to real-estate brokerage firm Redfin. That was the 29th consecutive month of year-over-year supply declines. Sales were also nearly flat, up by just 0.4% compared to last year.

The National Association of Realtors forecast this past November that existing home sales would experience flat to modest growth during 2018. This past January, sales fell 3.2% from the previous month and were 4.8% lower than a year ago – the largest annual decline since August 2014. And even as total inventory rose by more than 4.0% from the previous month, it was still 9.5% lower than a year ago.

Higher Prices, Higher Mortgage Rates

Fewer homes for sale and pent-up demand has laid a strong foundation for prices in recent years. Monthly home prices have risen for nearly six-straight years, according to the National Association of Realtors. Median prices for all housing types were up 5.8% in January compared to a year ago. And a composite of home prices in 20 cities as tracked by the S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index rose by 6.3% in December compared to a year ago.

Average price gains for homes within the 20-city area covered by the S&P CoreLogic Case-Shiller index are up 62% from the financial crisis low, yet inflation is up by only 12.4% during the same period. “The rise in home prices should be causing the same nervous wonder aimed at the stock market after its recent bout of volatility,” David M. Blitzer, managing director and chairman of the index committee at S&P Dow Jones Indices, said in the press release.

Indeed, not only are prices on the rise but so too are mortgage rates, another concern for home sales. Since the beginning of the year rates for 30-year fixed-rate mortgages have risen above 4.40% for the first time in more than four years.

Average rates for 30-year fixed-rate mortgages fell slightly during the week through March 15 to 4.44%, compared to 4.46% the previous week, according to Freddie Mac. While the most recent figure represented the first time rates have declined in 2018, the previous week’s rate was the highest for 30-year fixed-rate mortgages since January 2014.

Based on a consensus forecast in which mortgage rates increase by about 82 basis point this year (they’re already up by more than 40 basis points from year-end), research from CoreLogic suggests home buyers’ mortgage payments could rise up to three times faster than home prices during 2018.

The property research firm is forecasting median home sales prices to increase in 2018 by 3.4% after adjusting for inflation. Based on these projections and the consensus forecast for mortgage rates, CoreLogic estimates that inflation-adjusted mortgage payments would rise by 13.9% during the same period.

“Combining even slightly higher rates with price growth this strong will make it even more challenging for first-time buyers to find affordable homes this year,” Nela Richardson, Redfin’s chief economist, said in a press release. The good news for sellers, Richardson said, is that modest rate increases are unlikely to curtail buyer demand. For example, only 6% of respondents in a survey commissioned by Redfin said they would cancel their buying plans if rates rose above 5%.

For their part, homebuilders’ stocks have underperformed the broader market for the year thus far. Concerns over higher mortgage rates, the impact of the limit on tax deductions for state and local taxes, and margin erosion (builders’ costs have been increasing, partly due to higher lumber and concrete prices) have been among the narratives of why their shares have declined. Through March 19, the S&P Homebuilders Select Industry Index is down by 6.9%, while the broader S&P 500 is up by 1.5%.


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