MNI 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$$$]