Why Still A Housing Shortage?

The Mortgage Corner

  Graph: Econoday

A recent survey of California’s housing market reaffirmed the well-known fact that California has an affordability problem. The median home price is now $544,900, up 80 percent from 2011—though that’s a deceptive comparison because mostly due to bottoming of housing prices during the busted housing bubble when the median price sank below $400k.

And the California Association of Realtors (CAR) reports the California Housing Market Experiencing Shift as Home Sales Continue Descent in September, per Calculated Risk. “The California housing market posted its largest year-over-year sales decline since March 2014 and remained below the 400,000-level sales benchmark for the second consecutive month in September, indicating that the market is slowing as many potential buyers put their homeownership plans on hold,” said the CAR

California has always been a trend setter.  So what is causing the affordability problem? Most respondents (28 percent) in the USC survey thought the lack of affordability was due to the lack of strong rent control laws, while 24 percent said it was due to lack of low-income housing funds. Sixth on the list was insufficient home building.

There is a statewide rent control law that allows landlords to raise rents to market rates when tenants move out, but otherwise increases are capped at 2 percent annually. This obviously hasn’t been enough to slow rising rents in pricey California.

That’s in large part because the 1995 Costa-Hawkins Rental Housing Act said any local rent control passed after February 1995 would not apply to large amounts of housing stock, including new apartment buildings occupied after that date, single-family homes, duplexes and condominiums. Local politicians and activists wanting to pass new laws could only limit rent increases for tenants living in housing built before that year.

Then what does that tell us about the housing shortage and affordability? Californian homeowners, at least, don’t want to see more homes built too close to them, or higher density zoning laws enacted that over crowd neighborhoods, but would rather be NIMBYs that want affordable housing built in someone else’s neighborhood.

National housing starts in September came in on the low side of expectations, down 5.3 percent to a 1.201 million annualized rate with completions very weak, down 4.1 percent to a 1.162 million rate that's the lowest since November last year. Hurricane Florence certainly didn't help the South where starts fell 13.7 percent but the Midwest, which was not affected by the hurricane, saw starts fall 14.0 percent.

Existing home sales were also disappointing. Sales of existing homes fell 3.4 percent in September to a 5.150 million annualized rate. September's result is the weakest in nearly three years, since November 2015.

This weakness on the national level happened despite price discounting by sellers, said Econoday. The median sales price for an existing home fell a monthly 2.8 percent in September to $258,100. A comparison of year-on-year rates, at plus 4.2 percent for prices, with the sales rate, at minus 4.1 percent, suggests that prices may have further down to go.

So despite the housing shortage, many neighborhoods are reluctant to add to their housing shortage. And rising mortgage rates are also denting demand. What about rents? Apartment List reports that nationally, real spending on new multifamily construction showed a long-term upward trend prior to the collapse of the housing bubble, and it has rebounded strongly in the aftermath of the collapse, such that it is currently near its 2006 all-time high.

This is resulting in lower rent increases in many large cities. Of the 25 biggest cities in the U.S., Apartment List found seven — Baltimore, Chicago, Pittsburgh, Portland, Seattle, St. Louis and Washington, D.C. — where median rental rates actually decreased year over year—another reason new homebuyers are holding back.

Economists at Freddie Mac that analyzed the pace of new housing construction found that years of underbuilding has left the U.S. with a cumulative shortfall — that is, supply compared to historical averages — of 4.6 million housing units in the years since 2000, as I said recently. That number is especially stark considering that builders constructed a 1 million unit surplus of homes in the bubble years of the last decade.

There is still a housing shortage, in other words, with affordability the main problem holding back sales.  So no housing bubble, yet!

Harlan Green © 2018

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