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Free AccessMNI ANALYSIS: Affordability Concerns In US Housing
WASHINGTON (MNI) - Consumers are quickly scooping up houses off the market
in order to lock a mortgage rate in while interest rates remain low, causing a
run on supply and forcing prices to not only rise for new and existing homes,
but also causing a rise in rental prices. While rising prices is not an issue in
of itself, the issue of the potential for sustainability persists in this
evolving economic climate as wages struggle to keep pace.
--INVENTORY FALLS BEHIND
Developers have struggled to keep up with low-interest-rate driven demand
in the housing market, as April's Non-Manufacturing ISM report continues to show
capacity issues and labor shortages constraining construction. This inability to
keep up with demand is highlighted by construction's order backlogs climbing
again in April.
As construction falls behind demand, the number of completed homes
available on the market has begun to stagnate. For the first time since the
series start in 1999, March's homes for sale that are not yet started are as
high as the number of homes for sale already completed. This is indicative of
developers promising homes to eager buyers faster than what is capable of being
built.
--RISING HOME PRICES
With inventories struggling to meet demand, the median new home price has
been trending higher, at elevated levels even after inflation adjustments - as
seen in Figure 2. Highlighting these rising costs, March's new home sales show
that the median home prices shot up 3.5% month/month to $337,200 (in current
dollars, not seasonally adjusted). This price neared the series high of
$343,400, reached in November 2017. When the sales price of new homes is chained
to 2009 dollars, it shows there is still a price increase that is not due to
inflationary pressures.
The distribution of new houses sold by price also indicates a shift in
availability of affordable housing. The number of new homes sold in the least
expensive bracket captured by the Census Bureau (under $150,000) currently makes
up just 5% of homes sold in the month of March. This share has dropped
dramatically since the series start in 2002, when 29% of all homes sold were in
the least expensive bracket - signifying a general lack of inventory of more
affordable new housing.
A shortage of new home inventory has also fed through to existing home
sales, as a lack of new home inventory prevents existing homeowners from moving.
The March existing home supply was down 7.2% year/year, aiding the median sales
price in its 5.8% year/year rise, making it the 73rd consecutive month of
year/year price gains.
Existing home shortages and climbing prices have also created a lack of
inventory in the least expensive bracket of homes captured by the NAR (under
$100,000). Consequently, March's report shows existing home sales in this
bracket have fallen 20.7% year/year.
--AFFORDABILITY ISSUES TRICKLE INTO RENT
The rising cost of new and existing homes has been a barrier to entry for
some, restricting first time home ownership. The NAR's 2018 Home Buyer and
Seller Generational Trends reports that the percentage of buyers of existing
homes is down relative to 2017, at 34% of all buyers.
Those unable to enter the housing market have had to remain in the rental
market for longer, and this influx of renters has pushed demand to again outpace
supply, as noted by Molly Boesel, an economist at CoreLogic. Boesel explains
that the inventory shortage has actually forced prices in lower-priced rentals
to face a faster pace of price hikes than their higher-priced counterparts, as
renters compete for affordable housing.
Further, in order to entice landlords to keep properties in the rental
inventory, as opposed to cashing out at higher resale prices, rental incomes
have had to rise.
Consequently, rental prices have been climbing quickly, with CPI Rent of
Primary Residences growing 3.6% year/year, reaching a rate of growth last seen
during the housing bubble.
--AHE STRUGGLES TO KEEP UP
As both the cost of rent and home ownership mount, it is important to
consider how wage inflation compares to this rising cost of living. A look at
CPI rent of primary residences, to capture the rising cost of rent on the
consumer, and CPI owners' equivalent rent, to capture the implicit cost of home
ownership, shows that since 2013, both have consistently grown at faster rates
year/year than average hourly earnings.
As the costs incurred from either renting or buying a home grow relative to
wages, consumers are shouldered with a higher cost of living and less disposable
income. This continued softening of real wage growth will mean real limitations
on consumer expenditures, savings, and investments in the future - as rising
housing costs jeopardize other areas of economic growth.
[TOPICS: MAUDS$,M$U$$$]
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Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.