Despite Affordability Concerns, Existing Home Sales in U.S. Rebounding

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According to the National Association of Realtors, existing-home sales are expected to finish the year at their highest pace since 2006, but accelerating price growth and rising mortgage rates have the potential to slow sales.

Lawrence Yun, chief economist of the National Association of Realtors, who presented his midyear economic and housing forecast, was joined onstage by Robert Dietz, vice president of tax and market analysis at the National Association of Home Builders. Dietz shared the building industry's perspective on the housing market and the issues affecting housing supply.

Yun said existing-home sales are measurably higher than a year ago, and strengthened in March as more buyers entered the market as the spring buying season got underway.

"Sustained job growth and interest rates below 4 percent have been the catalyst behind the improvement in sales," said Yun. "The demand for buying is especially strong in parts of the country where jobs gains and economic activity have outpaced the rest of the nation - particularly in states like Utah and Florida and cities such as Denver."    

After falling slightly below a pace of 5 million in 2014, Yun expects home sales to rebound and steadily improve, ending up at a pace around 5.30 million (the highest since 2006) this year and 5.5 million in 2016. Yun expects the national median existing-home price to rise to around 6 percent this year (5.7 percent in 2014) before moderating to 4 percent in 2016.

On the topic of home prices, Yun said increasing demand in recent months, without meaningful gains of new and existing-homes available for sale, is starting to negatively impact affordability and is pushing price growth to unhealthier levels.

"The exception is the Northeast, where outside of Boston, contract activity and price appreciation have stagnated since late last year because of slower economic growth and weaker local job markets," he said.

A large portion of Yun and Dietz's remarks this morning centered on the topic of housing supply. According to Yun, new home construction continues to underperform and is hampering overall sales from being higher.

"Housing supply needs to increase measurably to meet the pent-up demand for buying," said Yun. "To put it in perspective, there were 37 million more people in the U.S. last year compared to 2000, yet existing-home sales that year were higher (5.2 million) than last year (4.9 million)."

Dietz added that unlike the existing-home market, demand for single-family new home construction remains weak, and the homebuilding industry is acting accordingly by focusing on multifamily rental housing. "According to our data, new home construction for first-time buyers is about half of the long-term average and the reason is simple: the decline in homeownership and marriage rates among young adults," he said.

Yun and Dietz both also pointed to several factors hurting homebuilders, including increasing costs for building materials and builders' inability to obtain financing - especially from smaller community lenders.

Looking ahead in the building market, Dietz said activity is not expected to return to normal levels until at least 2017. He also pointed to NAHB's data on townhome construction as an indicator to closely follow. "A gradual uptick in the building of townhomes would lead me to believe that young buyer demand is finally on the rise," Dietz said.

Yun is forecasting housing starts to come in around 1.1 million this year and reach 1.4 million in 2016, which he said is still below the 1.5 million needed each year to keep up with the underlying demand. New-home sales are likely to total 570,000 this year, and increase to 720,000 next year.

Referring to NAR's recent study looking at wealth inequality, Yun said rising home prices in many metro areas have helped homeowners build housing wealth in recent years, but the continued decline in homeownership means the gains are going to fewer people and leading to worsening inequality. "Household net worth is at an all-time high, but the gains are mostly going to wealthier households, who in turn have helped propel vacation home sales to record levels," he said.

Yun added, "Although there are metro areas that are the exception - such as Austin, Texas - homeownership is declining in most parts of the country, and the inability for renter households to become homeowners is leaving them behind financially."
Moving forward, Yun does anticipate the homeownership rate to slightly decline for a couple more years before gradually rising as more renters eventually transition to homeownership.

After zero growth in the first quarter, Yun anticipates Gross Domestic Product to pick up in the months ahead, likely closing at 2.3 percent this year before increasing to 3.0 percent in 2016.

Yun expects the U.S to start entering a rising interest rate environment, with the Federal Reserve increasing short-term rates in September and mortgage interest rates gradually moving upward over the next year, hovering around 4 percent in 2015 and edging-up past 5 percent in 2016.

"The impact of rising rates on affordability will greatly depend on two things: housing supply keeping up with demand and the strong pace of job creation eventually leading to meaningful wage gains," he added.