First-quarter GDP may be cool, but housing market downright balmy
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GDP growth is not strong, but the housing market is more than fine. So fine that my forecast for the year is upgraded. Existing-home sales will rise by 3.5 percent and home prices will get a 5-percent boost in 2017. 

At the start of the year, home sales were expected to only match up with the last year because of higher mortgage rates and diminishing affordability conditions. Meanwhile, home prices, after increasing over 40 percent in the past five years — when income only grew by 11 percent — was considered topped out with little room for growth. 

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The first quarter performance proved otherwise — both home sales and home prices were higher by 5 percent, and there’s growing evidence that consumers are feeling good about buying as realtors report increased foot traffic. Additionally, mortgage applications to buy a home are above last year's levels, and signed contracts to buy a home, despite a small decline in March, are running essentially at decade highs. 

 

Not only are the buyers out in the market, but they are committing quickly. The typical days on the market for a newly-listed property is short at only a month. Month’s supply of inventory is less than four months, which is well below the six-to-seven months that is considered more balanced.

Hesitant buyers are left spinning as the previously-considered properties are gone. Escalation clauses — where a prospective buyer bids at one price, but is willing to increase his or her bid should the seller receive a higher bid elsewhere — are increasingly common. These conditions almost feel similar to the last housing market bubble.

Fortunately, the housing market is not in a bubble. What is different? First, the buyers are coming in with higher down payments and require much higher credit scores to obtain a loan. That is significantly different from the bubble years of the past.

Second, there is not enough new home construction. In the mid-2000’s, homebuilders were putting up over 2 million new housing units a year. Today, it is essentially half that level. Prices do not fall when there is not enough supply. 

One assumption in the forecast is for the economy to show better growth. Despite the very disappointing first-quarter GDP of 0.7 percent, the remainder of the year should be decent-to-good at 2-3 percent growth. The strengthening housing market will be one major contributor to the economic growth.

Higher home prices and housing equity accumulation will help boost consumer spending. Housing starts have to rise to relieve inventory shortages, which in turn will help with the investment component of GDP. 

Other economic data suggests little threat of a recession. Job openings are at historic highs while the number of people filing for unemployment checks are at historic lows.  

Though President Trump's tax reform proposals have many positive attributes, there are major concerns that will need to be reworked as it moves through Congress, such as diminishing the attractiveness of homeownership. The final package will no doubt preserve code in favor of homeownership and have stimulus aspects for the economy.

With no imminent threat of a recession, the housing market’s strong first quarter sets the foundation for continued gains the rest of the year.  

 

Lawrence Yun is the chief economist and senior vice president of research at the National Association of Realtors. He's a regular contributor on CNBC.


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