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U.S. market needs more homes to sell

Homes prices have never been this high, and newly listed homes are flying off the market at a record pace. So why are Realtors worried? Lawrence Yun, chief economist of the National Association of Realtors (NAR), spoke with Scotsman Guide News this week about why stubbornly low levels of home inventories for sale are creating a drag on the market.  

Are you concerned about how fast home prices have been rising?

It is a faster-than-average price appreciation, but I would say that I am concerned for renters’ ability to buy. I am not concerned that it is a bubble where prices could decline measurably.

YunWhy isn’t it a bubble?

Well, compared to 10 years ago, things are fundamentally different. The underwriting standards are much more stringent as reflected by very high credit scores of those loans that are being approved. Ten years ago, there was no documentation [and] the credits scores may have been fake credit scores. We know about subprime mortgages. That is one distinctive difference regarding the demand. The demand is quality demand this time versus funny demand 10 years ago. Related to the supply, there was an overproduction. Homebuilders were adding over 2 million housing units per year 10 years ago. Today, we are only slightly above half that level. The limited supply is clearly implying that we are not seeing any oversupply with impending price declines. So, it is fundamentally different, both demand and supply.

How would judge the relative affordability of homes right now?

That is the worrisome sign. Affordability is getting out of hand. In some markets, say Seattle, Denver, prices have risen significantly. And, therefore, where a middle-income person in the past may have been able to buy a median-priced home, that is no longer the case. That is the reason why it is contributing to this historic low homeownership rate that we have been stuck at for the past year, essentially at a 50-year low. We already know about the difficulty in California, where it seems like only the wealthy or super wealthy can buy a home. So, affordability is much more challenging, and that should be a very big worry for the country as a whole.

As for the inventory of homes for sale, have you ever seen the market this tight?

It is matching up with historically low inventories. Maybe by a few percentage points, it is at a historic low. What is also unique this time around is how fast things are selling. Based on the market, as reported by Realtors, it is slightly less than 30 days, less than a month. This is a fast-moving pace, which means that whatever shows up in the market is being quickly snatched up, and taken off the market. That is why the inventory remains very low.

But NAR recently got some encouraging data on this through its survey of potential sellers, right?

The homeowners are indicating that it is a good time to sell. Now the question is, will they act on their sentiments? For some people in markets with a very tight supply, there are people who may consider listing, but then they hesitate. They wonder if they sell their home, will  they be able to buy another property in the same market? If they are staying in the same metro, they are concerned that if they sell it, they may be unable to buy. This is giving hesitancy to people who say it is a great time to sell.

Would an increase in new-home construction be a key in relieving shortages?

Yes. One way to view it is that currently people are playing musical chairs. They are standing up and rotating. They hope to find an empty chair. If we introduce more empty chairs into the mix, then people will feel much more comfortable. Right now, because new homes are not adding to those homes on the market, people should be concerned about whether they should stand up and sell their property. At the moment, the homebuilders are key to the solution, but unfortunately the increases being brought into the market has been grossly inadequate — only a marginal increase when we need a great, fast ramp up.

You have been quoted as saying that the market may be headed for ‘a crisis’ unless housing shortages are relieved? Could you explain what you mean by that?

A crisis not in terms of a housing-market bubble and crash, but a crisis in terms of affordability. The economy is doing fine — consistently over 2 million job creations in each of the past four years and likely another 2 million this year. With job creation, this is creating housing demand. But if there is inadequate supply, the prices will get pushed up way above people’s income growth, and that will lead to affordability challenges. We may plunge more in terms of homeownership rate. The homeownership rate is already at a 50-year low and it could decline even further if we don’t have more supply from homebuilders adding construction.

How do you think that homebuilders will respond?

The likely scenario is that homebuilders will marginally increase supply. Over the next couple of years, I believe home prices will outpace people’s income. It has been the case for the past five years, and it is unsustainable.


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