Mortgage Matters: Housing Supply VS. Slowing Sales…. Again

Fannie Mae, Freddie Mac, the National Association of Realtors, and the Mortgage Bankers Association are all in agreement that rates will continue to increase over the next 12 months…

by, Brian Barker
According to the National Association of Realtors (NAR), the amount of inventory of homes for sale this year has increased for the last four months, as compared to last year, all while sales of existing homes have slowed compared to the same period.

This is a current anomaly in a market that seems to be full of anomalies. For more than three years leading up to this point, the exact opposite was true; inventory dropped while sales increased steadily.

NAR’s Chief Economist Lawrence Yun shed some light on what could be contributing to this shift, “This is the lowest existing home sales level since November 2015. A decade’s high mortgage rates are preventing consumers from making quick decisions on home purchases. All the while, affordable home listings remain low, continuing to spur under performing sales activity across the country.”

Since January 2018, 30-year fixed mortgage interest rates have increased nearly a full percentage point (from 3.95 percent to 4.9 percent). Fannie Mae, Freddie Mac, the National Association of Realtors, and the Mortgage Bankers Association are all in agreement that rates will continue to increase over the next 12 months.

“The rise in [mortgage] rates paired with this very strong price appreciation absolutely is slowing housing,” said Fannie Mae’s Chief Economist Doug Duncan. Even though rates are higher than they’ve been in a decade, they still remain well below the average for the 1970s, 80s, 90s, and 2000s.

Elizabeth Mendenhall, President of NAR, said it best, “Despite small month over month increases, the share of first-time buyers in the market continues to underwhelm because there are simply not enough listings in their price range.”

Prices of starter and trade-up homes have appreciated faster than their higher-priced counterparts. Over the last 5 years, the lowest-priced homes have appreciated by 47 percent while the highest-priced homes have appreciated by only 24 percent.

According to the Institute of Luxury Home Market’s Luxury Market Report, the $1M price range is now experiencing a buyer’s market. This means that supply (inventory) has finally caught up with demand and buyers are in the driver’s seat when it comes to negotiations.

This is a new trend—even during the fervor of the multiple bids in less than an hour scenario in the last two summers—luxury homes were still in a market of 5-10 years prior. Additionally, many real estate agents are having greater success in helping buyers in this price range make necessary and price cuts/pricing decisions in order to entice offers.

Keeping Current Matters

How the Labor Shortage is Impacting Housing

Among the benefits of firming economic growth—GDP increased at a 4.2 percent annualized rate in the second quarter of 2018, the fastest pace since 2014—is ongoing job creation and low unemployment.

At 3.7 percent, the current unemployment rate risks being too low. Right now, there are more open, unfilled jobs in the economy than there are unemployed persons to fill them.

While the construction sector has faced this labor shortage for years, the rest of the economy is now experiencing similar conditions. On the positive side, low unemployment supports and grows rental and for-sale housing demand.

However, a low jobless rate also increases the risk of inflationary wage growth. In other words, wage growth not driven by worker productivity gains but due to a scarcity of workers and competition among businesses threatens to overheat the economy and spur inflation.

Higher costs in construction due to labor scarcity is one factor responsible for recent home price gains. These price increases, along with higher mortgage interest rates, have in turn reduced housing affordability to a 10-year low, according to the NAHB/Wells Fargo Housing Opportunity Index.

The index shows that only 57 percent of new and existing home sales were affordable for a typical family during the second quarter of 2018.

Despite some softening of housing data due to declining housing affordability, the labor shortage challenge for builders and remodelers continues.

According to NAHB analysis of government data, in August there were 298,000 unfilled construction sector jobs, which marked a post-Great Recession high.

When measured as a percentage of total open jobs, for the past two years the labor shortage has been worse than during the peak of the building boom.

The effects of the scarcity and higher cost of workers are clear. NAHB data indicates longer build times, more delays, and higher costs for workers and subcontractors.

As a result, industry discussion around solutions is in full swing: recruiting the next generation of workers, expanding the labor pool (only 9 percent of the construction sector currently consists of women), and investing in new building systems and methods to improve worker productivity.

It’s worth noting that worker productivity in home building has grown by only 3 percent in the past 25 years, compared with 34 percent for the overall economy.

The industry must make progress in all of these areas—no single solution will be sufficient. Expanding the labor force without improving productivity will help in the short-run but would result in higher costs in the future.

And while the modular and panelized/pre-cut sectors are one possible source of productivity gains, because they each only make up 2 percent of the single-family market, they’re unlikely to have a meaningful impact overall, even as these sectors expand.

Source: Robert Dietz
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Brian Barker, Corridor News Contributor
BBVA Compass