Housing Outlook - Low Inventory Continues into 2018? 3 Expert Predictions

How bad is the inventory shortage plaguing the national housing market? One measure of the lack of solutions is that at least some experts are looking over the horizon to the death of the Boomers. "Boomers own a majority of owner occupied homes in the U.S.," observes Ralph McLaughlin, chief economist at home search site Trulia. "As far as we are aware, they have not found the fountain of youth, so eventually we might age out of the problem."

At the start of 2017 experts anticipated price growth would slow, inventory would bottom and mortgage rates would climb. So far, things are not going as forecast. Now that we’re a little more than halfway through 2017, here's a look at where thing stand and where they could go next:

1. Inventory will remain low.

Low inventory is the hidden force influencing every other housing market stat. It's the reason that prices are up and why new listings are selling at an unprecedented clip. "Everyone has been talking about tight inventory but I think we are OK calling it a straight up inventory crisis at this point," says Svenja Gudell, chief economist at real estate data firm Zillow. "We just don't have enough homes." According to a Zillow analysis, the current number of homes for sale is about equal to the housing supply in 1994.

The trouble is, 63 million more people live in the United States than did 23 years ago. So it's not that there aren't any new listings, but there aren't nearly enough. "The outflow is greater than the inflow at this point," says Gudell. "At some point something is going to give."

The crunch is not universal. In general, buyers at the high end of a market will have more options since luxury homes take longer to sell and because builders are concentrating on that segment. Regional differences also exist. New supply is particularly scarce on the coasts.

2. Climbing demand will continue to push prices higher.

Thanks to low inventory and high demand, national home prices were up 5.58% through May, the most recent reading of the S&P CoreLogic Case-Shiller U.S. National Home Price Index available. Demand is not expected to dissipate anytime soon. Two polarizing reasons: policy and Millennials. "Trump administration policies are over emphasizing demand and under emphasizing supply," says McLaughlin. "Policies that push up demand are only going to make price growth worse."

Proposed policies that could boost demand, says McLaughlin, include doubling the standard tax deduction and dismantling the Dodd Frank Act, which could lead to looser lending criteria. (That said, credit availability is not thought to be a major drag on the overall market right now, especially since Fannie Mae introduced new policies in April to make it easier for borrowers with student debt to qualify for a home loan.)

Meanwhile, Millennials keep getting older. "The bulk of that generation sits in their mid-20s somewhere, they are going to move into their 30s and want to buy homes," observes Gudell. That prediction is starting to play out: the homeownership rate in the second quarter was 63.7%, that's up 0.6% from a year earlier when the rate hit an all-time low. For the last two quarters the number of new owner-occupied households was greater than the number of new renter-occupied households. If the trend continues it would also contribute to higher prices.

3. Affordable housing will remain elusive.

The median value of all homes--listed or not--in the U.S. is $200,000, according to Zillow. Given recent job and income growth, most American households can afford that price. But good luck actually finding a place listed for that much. The median home sold for $263,800 in June, according to the National Association of Realtors. And, according to Trulia, starter home buyers are using an increasing share of their income to pay for housing.

Why aren't low priced homes listing? More than twice as many owners of homes at the bottom third of the market by value are underwater on their mortgages than at the top of the market and negative equity makes it almost impossible to sell. Builders can't make a profit at lower price points, so in June the median new home price was $310,800. And in recent years the share of single-family homes being rented has skyrocketed, particularly at the lower end, and many of these are owned by investors who have no desire to sell.

*Please reach out to me at DavidJohnstonRE@gmail.com or call me at 858-774-8063 for free advice on finding your dream home in this low-inventory market!*