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Lack of affordable homes is hurting the housing market
The housing market turned sharply in 2018. From the frenzy bidding activity and tremendous shortage of inventory in the spring months to measurably softer home sales and homes sitting on the market for much longer toward the end of year.
Home sales in November, at an annualized pace of 5.32 million, were 7 percent below the same time last year. Total inventory increased 4 percent from the prior year. The median home price grew by 4.2 percent to $257,700. Investors stepped away, probably sensing that the days of easy price gains and profits are over.
Rising mortgage rates have cut into housing affordability. The rising 30-year fixed rate mortgage, which rose from 3.9 percent at the end of 2017 to 4.9 percent in the past month, has burdened monthly payees by additional $180 per month for a middle-priced homebuyer.
Another factor hurting home sales is the strong growth in home prices well in excess of income growth. From 2012 to 2018, median home prices rose 44 percent while average hourly wage earnings increased by just 16 percent.
Out in the West region, the typical home price surged 57 percent over the same period. No wonder the West region is currently the center of the housing drama. In November, home sales plunged by 15.4 percent in the West.
The West region also recorded a sluggish price growth compared to other major regions of the country with only a 1.8-percent price gain.
There were early indications of a softening housing market even before the increases in interest rates. At the start of the year, consumer sentiment about home buying took a dip.
Around 45 percent of consumers from a National Association of Realtors (NAR) survey in 2016 and 2017 had indicated that it was a good time to buy. It then fell to 38 percent in the first quarter, a data point that was overlooked because at that time home sales were roaring with an annual price appreciation of a strong 6 percent.
Additionally, the weakest consumer sentiment was recorded in the West region. When those already in the market were gobbling up properties, the pipeline of future buyers was evidently thinning out fast.
The reason for the weakening consumer sentiment was not due to a weakening economy or from the belief that home prices were cresting at the top. Job growth has been quite spectacular throughout the year to reach a rare point of where there were more job openings than the number of unemployed.
The current unemployment rate of 3.7 percent is one of the lowest points in modern history. To note, job growth has been particularly strong in the West.
In regards to home price expectations, people who believe home prices would rise in the upcoming year outranks those who expect prices to fall by a ratio of 5-to-1 in the recent NAR survey.
A similar optimistic outlook on home price is found in both a Gallup poll and Fannie Mae consumer poll. Home buying generally rises if people expect higher home prices in the future, as it turns real estate into personal wealth.
Why then are fewer consumers indicating it is a good time to buy? The reason is tied to a lack of affordable housing inventory. Consumers in the past physically entered between 10 to 12 homes before deciding to purchase.
But this past year's spring market frenzy forced consumers to decide quickly after viewing only a few homes. Otherwise, that home was quickly taken in a multiple bidding war. Some consumers even uncomfortably bypassed the normal due diligence of home inspection and price renegotiation after an appraisal.
More importantly, the fast price gains knocked many consumers out of the loan eligibility space. That is why consumers retreated and home sales have been soft. This marked shift is primarily on the moderate-to-middle priced homes, and not at the million-dollar price points.
Inventory is plentiful on the upper end and still not enough on the lower end. The months' supply, or the industry gauge of the tightness of the market, was 9.6 for the $1 million-and-above homes and 3.5 in the price point between $100,000 to $250,000.
More inventory of affordable homes is needed to get the housing market back on an upward path. There is still a sizable pent-up demand. Home sales in 2018 looks to match the numbers set in 2000, though worth noting that there are 17 million more jobs now compared to the turn of the century.
Policies at the local level of reforming land use and zoning regulations can greatly help. Other policies to consider include reducing impact fees and parking space requirements in urban areas. Even with these changes, developers of affordable housing still may not be able to make the numbers work.
Additional efforts like turning unused publicly owned land to affordable housing and giving tax relief to homebuilders in designated Opportunity Zones are required.
Finally, the Federal Reserve should be immune from political pressure. Yet, the Fed should consider all the key data points. The inflation rate will soon be zero due to collapsing oil prices. The Fed therefore should be very cautious about raising interest rates when there will be no future inflation.
Housing is one sector sensitive to interest rate changes. If the housing market continues the downward momentum into the next year, then the possibility of an economic recession greatly rises.
Lawrence Yun is the chief economist for the National Association of Realtors.