Home buyers face narrow options searching for homes in many markets, and will continue to face constrained supplies for at least four more years, writes Lawrence Yun, the chief economist for the National Association of REALTORS®, in his latest column at Forbes.com.
Inventories remain stubbornly low. At the end of October, there were 2.02 million homes listed for sale, which equates to about a 4.3-month supply. Yet, a balanced market should offer closer to a 6- to 7-month supply.
The low supplies have led to home prices outpacing Americans’ income growth for the past five consecutive years. From 2011 to 2016, the median home price has increased by 42 percent compared to the median household income gain of only 17 percent.
“Such disparity hurts affordability and is unsustainable over the long haul,” Yun writes.
More homes for sale are needed and home builders are the key, Yun notes.
“It cannot be a simple case of existing homeowners listing their home,” Yun adds. “Keep in mind that nearly all home sellers are also home buyers, and thereby not truly providing a net increase to the inventory.”
Instead, home builders need to ramp up construction, and investors who purchased homes to rent out need to unload those rental properties onto the market, Yun says.
With landlords still able to command high prices, Yun says it’s doubtful investors will sell their single-family rentals anytime soon. As such, any substantial gains in inventories likely will rest on home builders.
Economists say about 1.1 to 1.2 million net new households are formed each year. Further, about 300,000 to 400,000 older, uninhabitable homes are demolished. As such, new-home construction needs to be around 1.5 million per year to keep pace, Yun’s research shows.
However, from 2007 to 2016, the average new-home construction has hovered around 870,000 per year.
In total, Yun estimates the country is short by 8.3 million housing units.
“The bottom line is that we need a few years of above-normal construction activity, say 1.7 million housing starts per year,” Yun notes. “Only then will we see a slight rise in vacancy rates to help lessen the rent growth pressure and bring the inventory of homes for sale to a more balanced market.”