It could be an Econ 101 case study: low housing stock collides with record-low mortgage rates and pent-up demand, pushing home prices higher and supply lower still.
Economists across the country have been shouting about the dearth of housing for years, particularly at the affordable or entry-level. The coronavirus pandemic only intensified the problem.
As of July, national housing inventory declined 32.6% year-over-year. The inventory of newly listed properties declined 13.4% nationally. This summer, homes stayed on the market for 18 fewer days than a year earlier. More agents are reporting bidding wars and homes on average are selling for 8.5% more than they did a year ago, according to realtor.com.
“Home prices have held up well, largely due to the combination of very strong demand for housing and a limited supply of homes for sale,” said Lawrence Yun, chief economist for the National Association of Realtors.
Recently, a surge in new construction has eased some of the pressure, but most in the industry say builders can’t build fast enough. Here are eight predictions from housing industry experts on what the rest of the year will spell for the nation’s housing supply. (The text has been lightly edited.)
Who she is: Sussman Professor of Real Estate and Finance at The Wharton School of the University of Pennsylvania and co-director of Penn Institute for Urban Research.
What she expects: Limited supply of housing has been an issue for years—since the recovery from the Great Recession. In the year of COVID, demand will continue to outstrip supply.
Her reasoning: A recent surge in housing starts, backed up by marked improvement in homebuilder confidence, is likely to lead to an increase in new starts through the end of the year.
Nonetheless, a dearth in starts in the first half of the year and limited inventory is likely to result in 2020 supply that is about the same relative to 2019.
Almost everything housing related—new home sales, home improvement spending, home prices, and, as of July, new construction—are in a V-shaped recovery; everything, that is, except inventory. Households in this time of COVID-19, who are happy with their homes, are not anxious to trade up. Instead they are staying put and refinancing, taking advantage of bargain-basement mortgage rates, lowering monthly mortgage costs, and maybe building that outdoor deck.
Who he is: Chief economist at Apartment List, an online rental marketplace.
What he expects: Housing supply will remain tight through 2021 as the pandemic’s effects continue to ripple through the economy. Rental vacancies in some areas will rise as near-record levels of new multifamily construction continue to come online, but we’ll still be talking about a lack of affordable supply for some time.
His reasoning: As we ride out this recession, single-family home construction still hasn’t recovered from that last one. The inventory of homes and rentals at affordable price points is low across the board, and housing supply remains extremely tight in coastal metros.
The pandemic will continue to dampen apartment demand and raise construction costs, so I don’t see construction picking up in a major way this year or next. The multifamily construction pipeline was very strong heading into 2020, so we’re likely to see rising vacancy rates in new apartment communities. Entry-level homes, though, will still be hard to find, which will keep home prices from falling.
That said, it’s also becoming clear that COVID-19 is causing a game of musical chairs in the housing market. Preferences may be changing, and remote work will make a generation of knowledge workers reconsider where they live. These trends may help cool down the hottest, supply-constrained markets and give mid-sized markets a boost.
Who he is: Co-founder of Landed, a company that helps teachers buy homes
What he expects: We will see even broader bifurcation in housing-supply elasticity from city to city.
His reasoning: The NIMBYs (“not in my backyard” groups) are not moving but some of the innovation economy is. What does this mean for housing supply? Housing supply is not going to move in lockstep across the United States.
It will continue to be difficult to develop new housing in cities like San Francisco where residents and regulation make it difficult to address demand. Less expensive metro areas that have smaller innovation economies and lower barriers to development are likely to benefit from a new influx of employees and employers rethinking their location strategies. New zoning and development will be a way that smaller cities capitalize on the opportunity, similar to many smaller scale Amazon HQ2s.
Who she is: President of the National Association of Hispanic Real Estate Professionals
What she expects: The demand for housing remains so high that it won’t be going away any time soon. Housing inventory will remain tight for the foreseeable future due to restrictive zoning, the high cost of materials and the construction labor crunch due in large part to current immigration policies.
Her reasoning: Although real estate is very location specific, the market as a whole will ultimately be stable. Right now, there is very little inventory and a very high demand fueled by historic low interest rates. Eventually, we will see some of the people that are in forbearance have to sell their homes. This will open up some inventory to the market.
Even with the loss of employment or income due to COVID, we won’t see a crash the way we did in the 2008 housing crisis because the loans are well-underwritten, and those who do have problems paying their homes will have enough home equity to sell their homes before going into foreclosure.
Who he is: CEO of John Burns Real Estate Consulting, which provides research and consulting services for the housing industry.
What he expects: Supply will increase slowly over the next few years, despite what the naysayers say about surging foreclosure volumes.
His reasoning: A high quality home has never been so important because people are spending so much time in the home, and the government is doing everything it can to keep people in their homes and to keep home prices high. New home supply will ramp up beginning next year, as the homebuilders have only increased land-buying activity very recently, and it takes a while to get building approvals.
Resale supply will increase in the markets where people are leaving, like urban California and New York, and remain tight elsewhere, where people are going. One interesting trend is a surge in accessory dwelling units being added to backyards as a very affordable housing solution.
Who she is: Principal economist at CoreLogic, a real estate data analytics provider
What she expects: Given the continued economic uncertainty and lack of activity among existing homeowners (repeat buyers), we anticipate the inventory shortage to persist throughout the rest of the year, with inventory levels remaining at 20% to 30% below last year’s levels.
Her reasoning: The availability of for-sale inventory has been falling, even prior to the pandemic, with active inventory down about 15% year over year at the beginning of 2020. However, the pandemic exacerbated the supply shortage, bringing inventory down to 30% by the end of July. Additionally, record-low mortgage rates have contributed to the supply shortage by bringing an influx of new buyers who have been quick to absorb the available inventory, while sellers have mainly refinanced their existing mortgages.
James P. Gaines
Who he is: Chief Economist at the Real Estate Center at Texas A&M University
What he expects: Listings of existing homes for sale remain tight and may get even more constrained because of limited incentives for current owners to move.
His reasoning: Baby Boomers, a primary homeowner group, continue to age in place, contrary to previous expectations. Current economic/pandemic effects have significantly reduced labor mobility. Households are not moving based on job transfers, changing jobs or even finding new jobs. Work from home is the new employment base.
Equally important, Boomers and non-Boomers alike are refinancing in large numbers at historically low mortgage interest rates, significantly reducing the incentive to move. And, even for “move over” households that might want to sell and buy something else, the circular effect of a limited inventory means not being able to find a suitable replacement property at the desired price.
Similarly, new home construction for years has not been able to keep pace with the increasing number of new households, much less existing households looking for a new home. Homebuilders, generally, are trying to build more houses as demand remains strong and especially with the current low-interest-rate environment.
The pandemic created a temporary slowdown in construction activity, but recent data suggest housing starts will start coming back. Even so, it likely will not be enough to satisfy the demand.
New home construction faces several headwinds, including local zoning and other regulatory obstacles that increase cost or significantly constrain new development, land and land development costs, and especially, cutbacks by community and regional banks funding acquisition and development construction activity. The short-term limitation of construction labor due to COVID-19 should be overcome, but will take time.
Who he is: Director of economic research for home listing site Realtor.com
What he expects: The overall supply of homes for sale in the U.S. has reached an all-time low and while declines may stabilize, the shortage will likely fail to see improvement before the end of the year.
His reasoning: Total housing inventory was already declining in nearly every market across the country prior to the pandemic. Now, low mortgage rates and COVID disruptions have only accelerated the declines. This summer, supply remains 36% percent below last year’s levels, moving increasingly far from balanced conditions.
Going into the fall, more new homes will be built and more sellers will enter the market, potentially easing the declines in overall inventory. But the shortage will persist. The improved inflow of new and existing homes won't be enough to absorb the massive demand in the market. Despite lingering coronavirus, lockdown disruptions and economic concerns, interest in real estate remains high. Low mortgage rates, an aging Millennial population, and pandemic-induced purchases, have increased the backlog of buyers, permeating the imbalance of supply and demand.
As the trend continues, supply will continue eroding in the mid- and low-tier segments, as well as in secondary and exurban markets, which tend to offer better value, more space, and lower entry barriers. In markets with resilient economies and strong technology sectors, more interest will gradually move away from overvalued city centers and into less dense areas, made more attractive by remote work options.
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