How bad is the inventory shortage plaguing the national housing market? One measure of the lack of solutions is that at least some experts are looking over the horizon to the death of the Boomers. “Boomers own a majority of owner occupied homes in the U.S.,” observes Ralph McLaughlin, chief economist at home search site Trulia. “As far as we are aware, they have not found the fountain of youth, so eventually we might age out of the problem.”
Apart from generational demise–still, thankfully, a long way off given that the youngest Baby Boomers will turn 53 this year–there’s no clear end in sight for the supply crunch. As the problem persists, experts are backing off earlier projections that the market would settle into a sustainable equilibrium at some point this year.
At the start of 2017 experts anticipated price growth would slow, inventory would bottom and mortgage rates would climb. So far, things are not going as forecast. Now that we’re a little more than halfway through 2017, here’s a look at where thing stand and where they could go next:
1. Inventory will remain an albatross.
Low inventory is the hidden force influencing every other housing market stat. It’s the reason that prices are up and why new listings are selling at an unprecedented clip. “Everyone has been talking about tight inventory but I think we are OK calling it a straight up inventory crisis at this point,” says Svenja Gudell, chief economist at real estate data firm Zillow. “We just don’t have enough homes.” According to a Zillow analysis, the current number of homes for sale is about equal to the housing supply in 1994. The trouble is, 63 million more people live in the United States than did 23 years ago. So it’s not that there aren’t any new listings, but there aren’t nearly enough. “The outflow is greater than the inflow at this point,” says Gudell. “At some point something is going to give.”
The crunch is not universal. In general, buyers at the high end of a market will have more options since luxury homes take longer to sell and because builders are concentrating on that segment. Regional differences also exist. New supply is particularly scarce on the coasts.
One hypothesis coming into the year was that inventory would bottom, making way for a slow climb higher. Supply was flat through the first quarter and then declined 8.9% in the second quarter. Even if that ends up being the low point there’s little reason to believe a true turnaround is imminent. New construction is expected to add just 610,000 homes this year (up from a year ago, but still just about 65% of the historical average) and many homeowners have recently invested in renovations to be able to stay in their current homes longer.
2. Climbing demand will continue to push prices higher.
Thanks to low inventory and high demand, national home prices were up 5.58% through May, the most recent reading of the S&P CoreLogic Case-Shiller U.S. National Home Price Index available. Demand is not expected to dissipate anytime soon. Two polarizing reasons: policy and Millennials. “Trump administration policies are over emphasizing demand and under emphasizing supply,” says McLaughlin. “Policies that push up demand are only going to make price growth worse.”
Proposed policies that could boost demand, says McLaughlin, include doubling the standard tax deduction and dismantling the Dodd Frank Act, which could lead to looser lending criteria. (That said, credit availability is not thought to be a major drag on the overall market right now, especially since Fannie Mae introduced new policiesin April to make it easier for borrowers with student debt to qualify for a home loan.)
Meanwhile, Millennials keep getting older. “The bulk of that generation sits in their mid-20s somewhere, they are going to move into their 30s and want to buy homes,” observes Gudell. That prediction is starting to play out: the homeownership rate in the second quarter was 63.7%, that’s up 0.6% from a year earlier when the rate hit an all-time low. For the last two quarters the number of new owner-occupied households was greater than the number of new renter-occupied households. If the trend continues it would also contribute to higher prices.
3. Affordable housing will be elusive.
The median value of all homes–listed or not–in the U.S. is $200,000, according to Zillow. Given recent job and income growth, most American households can afford that price. But good luck actually finding a place listed for that much. The median home sold for $263,800 in June, according to the National Association of Realtors. And, according to Trulia, starter home buyers are using an increasing share of their income to pay for housing.
Why aren’t low priced homes listing? More than twice as many owners of homes at the bottom third of the market by value are underwater on their mortgages than at the top of the market and negative equity makes it almost impossible to sell. Builders can’t make a profit at lower price points, so in June the median new home price was $310,800. And in recent years the share of single-family homes being rented has skyrocketed, particularly at the lower end, and many of these are owned by investors who have no desire to sell.
There is also a phenomenon that Gudell calls “bottom-tier musical chairs.” She explains:
If you spent a huge amount of time and stress and heartache trying to find an entry level home over the past couple years, once you were successful at it, I can easily see a lot of reluctance in getting up from it a few years later and trying to find another place – even if you could afford one. Especially given the intense competition, those buyers that were successful probably are just fine staying put for a little while and catching their breath, building equity where they are.”
Danielle Hale, chief economist at Realtor.com similarly notes: “It is a sellers market, but most sellers turn around and become buyers. So they face a lot of the same challenges.”
4. Homes that do hit will move fast.
Inventory “is not only making homes less affordable,” says McLaughlin. It is “making them much harder to catch if you can find one that is on the market.” Nationally, the share of homes still on the market two months after listing is 47%, the lowest share since Trulia began using the measure as a proxy for market speed in 2012. Back then 57% of homes were unsold after two months. Location plays a role here too, by and large markets where inventory has fallen most are moving fastest.
5. Mortgage rates will stay low.
Today the average rate on a 30-year fixed mortgage is about 3.85%, according to Bankrate. That’s below the roughly 4% rate seen at the start of 2017 and at the low end of the range of economists’ forecasts for the end of the year.
Consistently low mortgage rates have stumped economists for years, but especially since the Federal Reserve began raising short term interest rates in December. In the long run, continued action by the Fed should push mortgage rates upward. For now, however, investor confidence in the U.S. government is keeping rates low. If investors pull their money out of U.S. Treasury Bonds, which serve as a benchmark for mortgage rates, rates will go up as they did immediately following the 2016 election. In either case, interest rates would have to close to double for renting to become more attractive than buying in most markets. Though expensive markets would hit that tipping point sooner. “We just might be entering a stage where mortgage rates are just naturally lower, which of course is also keeping up home values,” says Gudell.