Housing Shortage Continues

The Mortgage Corner

Existing-home sales increased in October to their strongest pace since earlier this summer, but continual supply shortages led to fewer closings on an annual basis for the second straight month, according to the National Association of Realtors.

There just are not enough homes to satisfy the surging demand for housing in a fully employed economy with wages and household incomes rising substantially for the first time since the Great Recession. Part of the reason for higher demand—the Gen Y-er, millennial generation now wants their own living space.

Graph: Econoday

Total existing-home sales, https://www.nar.realtor/existing-home-sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, increased 2.0 percent to a seasonally adjusted annual rate of 5.48 million in October from a downwardly revised 5.37 million in September. After last month's increase, sales are at their strongest pace since June (5.51 million), but still remain 0.9 percent below a year ago.

Lawrence Yun, NAR chief economist, says sales activity in October picked up for the second straight month, with increases in all four major regions. "Job growth in most of the country continues to carry on at a robust level and is starting to slowly push up wages, which is in turn giving households added assurance that now is a good time to buy a home," he said. "While the housing market gained a little more momentum last month, sales are still below year ago levels because low inventory is limiting choices for prospective buyers and keeping price growth elevated."

Why has it taken so long for the housing market to recover, as I said last week? Fewer new households are being formed that would require a home of their own

A 2016 San Francisco Fed study by economist Fred Furlong on household formation concluded that many young adults chose alternative residential choices such as living with parents, other relatives, or friends, until now, as I noted.

“But there are signs that a readjustment is imminent,” said Furlong. “The current population share of young adults is fairly close to the share that existed at the start of the most recent housing boom. Also, while more young people are living with their parents, they are forming their own households, albeit later in life, leading to higher headship rates over time. Mr. Furlong notes that U.S. Census Bureau projections suggest that household formations will average about 1.5 million per year through 2020, which is much better than the 900,000 annual averages of the last 5 years.”

It will be the largest jump in household formation since the Great Recession, which means many more homes will have to be built to satisfy the demand, when there is already a labor shortage in the construction industry.

This is while total housing inventory at the end of October actually decreased 3.2 percent to 1.80 million existing homes available for sale, and is now 10.4 percent lower than a year ago (2.01 million) and has fallen year-over-year for 29 consecutive months, said NAR. Unsold inventory is at a 3.9-month supply at the current sales pace, which is down from 4.4 months a year ago.

Better news is that nationwide housing starts rose 13.7 percent in October to a seasonally adjusted annual rate of 1.29 million units the highest housing production reading since October 2016, when total starts hit a post-recession high of 1.33 million.

So what needs to be done to increase housing inventories? Marketwatch’s Andrea Riquier says we need double the construction workers we now have to boost construction—another 750,000, at least, enough to meet the surging demand from the millennial generation. They are the 18 to 34 year-olds—now the largest buyer group, comprising 42 percent of homebuyers, according to a September study by the Zillow Group.

The housing shortage is also exacerbated by many existing homes being kept off the market—Marketwatch estimates some 300,000—by investors that scooped up bargains from the housing bubble bust, and continue to rent them out.

Harlan Green © 2017

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