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Poor Dynamics Is Causing A Shortage Of Housing

June 3, 2017
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This week we were “treated” to poor pending home sales. Both pending home and existing home sales growth have been trending down since 2015.

The National Association of Realtors (NAR) blames slowing existing home sales on low inventory levels and lower affordability:

…. contract activity is fading this spring because significantly weak supply levels are spurring deteriorating affordability conditions. Much of the country for the second straight month saw a pullback in pending sales as the rate of new listings continues to lag the quicker pace of homes coming off the market. Realtors® are indicating that foot traffic is higher than a year ago1, but it’s obviously not translating to more sales.

Prospective buyers are feeling the double whammy this spring of inventory that’s down 9.0 percent from a year ago and price appreciation that’s much faster than any rise they’ve likely seen in their income.

Unfortunately, there is little evidence these astoundingly low supply levels are going away soon. Homebuilding activity has not picked up enough this year and too few homeowners are listing their home for sale.

I agree with the NAR that there just is not enough affordable housing. The low inventory levels for existing homes are contributing to the price growth – but is there is an overall shortage of new houses built? The blue line in the graph below represents the growth of household formation – whilst the red line is new home construction completion.

Based on the data in the above graph, since the beginning of the Great Recession there were almost a half million more new homes constructed than households formed. Up until the 21st century, there was good correlation between household formation and homes constructed.

However, historically 300,000 new homes are needed each year to replace those lost to fires, rot, other causes, or simply torn down to make way for new construction. Based on just replacements needs, 3 million new houses were needed since the beginning of the Great Recession instead of the half million above household formation actually constructed. The green line in the above graph is the combined need for new housing (year-over-year gain of households plus the replacement housing).

The bottom line is that the NEED for new construction is outpacing the supply. It seems the price for new and existing housing is above the price many buyers are willing (or can afford) to pay. It seems that there is a shortfall also of buildable land near many metros where people want to live.

So where are we headed? Is a growing percentage of newly formed households destined to live with their parents or share a house with somebody else? Whatever happens, it is apparent that housing dynamics (price and quantity) is not supporting a growing population living in the traditional array of housing arrangements. More unconventional housing arrangements (compared to history) appear to be operational, either by economic choice (housing affordability) or some other combination of reasons.

Other Economic News this Week:

The Econintersect Economic Index for May 2017 continues to forecast normal growth for the second month in a row. Six-month employment growth forecast indicates modest improvement in the rate of growth.

Bankruptcies this Week from none



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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