February 2017 - Making Millennials Move

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TH E M R EP O RT | 53 O R I G I NAT I O N S E R V I C I N G DATA G O V E R N M E N T S E C O N DA R Y M A R K E T THE LATEST DATA How to Solve the Housing Inventory Problem: Build More Houses An uptick in construction may lie ahead as home builder confidence increases amid promises of relaxed regulations. O ne way to solve the ongoing shortage of available homes for sale, which has put consis - tent upward pressure on home prices and caused some affordabil- ity issues due to price appreciation outpacing wage growth, is for the pace of building to increase. While some recent analysis shows the shortage of inventory may continue for a while, some reports indicate that the problem may begin to subside this year. The supply of homes for sale in December 2016 was 2.02 million, which calculates to a 4.3 month supply, which falls short of the 6 to 7 month supply needed for a balanced market, National Association of Realtors Chief Economist Lawrence Yun said. Homeowners merely selling homes will not alleviate the inven - tory shortage, since most sellers are likely to turn around and buy another home. The large number of single-family homes snapped up by investors for rent have contrib - uted to the shortage of homes for sale, but investors are not likely to sell these properties in large numbers due to recent healthy rent appreciation—which leaves new construction as the most likely way to solve the lack of inventory problem, Yun said. Yun said that logically, 1.5 mil - lion new homes need to be built each year in order to keep up with household formation and lost inventory, since 1.1 million to 1.2 million new households are formed each year and 300,000 to 400,000 homes are demolished. (The 50-year annual average for housing starts from 1950-2000 was 1.51 million.) November's New Residential Construction data from HUD and the Census Bureau reported an annual pace of just 1.09 million for housing starts, including both single- and multi-family (828,000 for single-family), falling short of the 1.5 million needed. Since the crash in 2007, housing starts have averaged just 870,000 annually, according to Yun. "The bottom line is that we need a few years of above-normal construction activity, say 1.7 million housing starts per year," Yun told Forbes. "Only then will we see a slight rise in vacancy rates to help lessen the rent growth pressure and bring the inventory of homes for sale to a more balanced market." Economists' forecasts for housing starts for the next few years fall way short of that number, how - ever, leading Yun to predict the shortage could last another four years. The good news for housing inventory is that the National Association of Homebuilders reported that builder confidence in December was at its highest level in more than 11 years largely due to the incoming administration's promises of regulatory relief for the homebuilding industry. NAHB Chief Economist Robert Dietz stated, "While the significant increase in builder confidence for December could be considered an outlier, the fact remains that the economic fundamentals continue to look good for housing as we head into 2017." More possible good news for the supply of homes for sale: Redfin's 2017 forecast predicted that inven - tory will rise by 1.7 percent by the end of the year and that this year will be the "fastest housing market on record" in terms of how quick - ly homes are selling. In November, the number of days a home stayed on the market declined over the year from 56 to 50 days, according to Redfin. we are encouraged that confidence is rising across investors, consum- ers, businesses, economists, and homebuilders, much of it appears to be in anticipation that the forthcoming administration and the new Congress will enact fiscal policies and deregulation that will help spur growth." The National Association of Home Builders found in its Housing Market Index for December that builder confidence was at its highest level in more than 11 years as builders anticipate regulatory relief that the new administration has promised. Duncan added that any pro- growth policies adopted by the new administration this year would take time to benefit the economy, barring any offsetting initiatives such as more restrictive trade policies. "The recent surge in interest rates amid continued strong home price appreciation are likely to present affordability challenges to home buyers, especially for young adults who are looking to enter the housing market for the first time," he said. "However, stronger economic growth, if it material - izes, should help support incomes, affordability, and the ongoing housing recovery." "Signs of cautious consumers this quarter, rising interest rates, the renewed increase in the U.S. dollar to a 14-year high, and heightened uncertainty in the political sphere suggest conservatism in our outlook." —Doug Duncan, Chief Economist, Fannie Mae

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