Housing Inventory Shortages and Tax Reform Effects Loom Large
The National Association of Realtors is reporting this month that a steadily improving U.S economy, sustained job growth, and rising confidence that now is a good time to buy a home should pave the way for an increase in existing-home sales in 2018, but continued supply shortages, and passage of a tax bill that disincentives homeownership, threaten to handcuff what should be stronger activity.
“Despite considerable demand all year, pending sales have lost a step in recent months because low supply is pushing prices higher and making homebuying less affordable in several parts of the country,” said NAR Economist Lawrence Yun.
With a few months of data remaining in 2017, Yun estimates that existing-home sales will finish at a pace of 5.47 million – the best since 2006 (6.47 million), but only a modest improvement (0.4 percent) from 2016 (5.45 million). In 2018, sales are forecast to expand 3.7 percent to 5.67 million. The national median existing-home price is expected to rise to around 5.5 percent this year and next year.
Yun cautioned that the House Ways and Means Committee’s release last week of its legislative proposal to overhaul the American tax code could very well affect home sales and prices next year and beyond. The tax bill in its current form is a direct tax hike on homeowners and nullifies the homeownership incentive for all but the top 5 percent of tax filers. Earlier this year, NAR released a full analysis of the House Republican blueprint for reform, finding that it could negatively affect home values by about 10 percent and raise taxes on middle-class homeowners by an average of $815.
Much of Yun’s presentation focused on the reasons why many would-be buyers are not reaching the market. NAR’s 2017 Profile of Home Buyers and Sellers, released earlier this week, revealed that first-time buyers were only 34 percent of sales over the past year, which was the fourth lowest since the survey began 36 years ago.
Rosen, presenting findings from Rosen Consulting Group’s three white papers released this year on the depressed homeownership rate, said a perverse mix of affordability challenges, student loan debt, tight credit conditions and housing supply shortages continue to hamper many households from owning a home. This is despite extremely low mortgage rates that should be fostering the biggest for-sale housing boom in American history.
“Ownership rates are currently below their peak across the younger age groups and in cities that have seen sharp price increases, and it’s not a good thing,” said Rosen, “A higher rate of homeownership makes sense. It is so important to the financial health of the economy. Homeownership helps households accumulate wealth over time, reduces inequality, increases investments in communities and boosts economic growth.”
According to Yun, the biggest impediment to sales right now and into next year is the massive shortage of supply in relation to overall demand. The lagging pace of new home construction in recent years is further creating a logjam in housing turnover. Without enough new homes on the market, homeowners are typically staying put for a longer period of time before selling, typically 10 years, which is keeping inventory low and hurting affordability.
Yun further commented, “The lack of inventory has pushed up home prices by 48 percent from the low point in 2011, while wage growth over the same period has been only 15 percent. Despite improving confidence this year from renters that now is a good time to buy a home, the inability for them to do so is causing them to miss out on the significant wealth gains that homeowners have benefitted from through rising home values.”
Pointing to Los Angeles and the Bay Area as examples of areas with significant affordability constraints, Yun said unhealthy levels of price appreciation are also occurring in many other markets with strong job growth, but without the commensurate rise in housing starts. As a result, the ability to buy a home has become extremely difficult for even those with well-paying jobs and is forcing households to flee expensive areas in the West and Mountain regions for more affordable parts of the country. This in turn could affect future job growth in these areas and ultimately soften housing demand.
Although Yun forecasts single-family housing starts to jump 9.4 percent to 950,000 next year, this is still below the 50-year average of around 1.2 million starts. New single-family home sales are likely to total 606,000 this year and rise to around 690,000 in 2018.
After two consecutive quarters of economic growth of 3 percent, Yun expects GDP to come in around 2.2 percent for the year and to expand to 2.7 percent overall in 2018, as long as job growth remains solid and residential construction picks up.
With the Federal Reserve unwinding its balance sheet and continuing its plan to slowly raise short-term rates, Yun believes mortgage rates will gradually climb towards 4.50 percent by the end of 2018.
“An overwhelming majority of renters want to own a home in the future and believe it is part of their American Dream,” said Yun. “Assuming there are no changes to the tax code that hurt homeownership, the gradually expanding economy and continued job creation should set the stage for a more meaningful increase in home sales in 2018.”