US Real Estate Market: 1Q 2018

For full-year 2017, US homeownership rose to 64.2%, according to the Harvard Joint Center‘s just-released State of the Nation’s Housing report for 2018. The uptick is the first in 12 years and a dramatic turnaround in the homeowner market.

The percentage of Americans who own their homes peaked at more than 68% in 2005 before the housing market collapse that followed. The slide in homeownership stretched until 2016, when the rate was at a 50-year low of below 63%. The Dallas-Fort Worth homeownership rate plunged even more to less than 60%.

The number of US homeowners in 2017 rose by 1.1 million last year after declining by an average of more than 150,000 a year between 2007 and 2015, the Harvard researchers found. Last year, the number of US homeowner households hit a record high of 76.2 million.

“Extremely low inventory conditions in most markets are preventing sales from breaking out, while also keeping price growth elevated,” said Sam Khater, chief economist at Freddie Mac. “Even if rates climb closer to 5%, sales have room to grow more, but only if current supply levels start increasing more meaningfully.”

Over the last year, rental households actually fell by a couple hundred thousand, which is a significant slowdown in demand against the backdrop of what has been healthy supply.
After the housing crash, millions of Americans lost their homes and became renters. And millennials eschewed homeownership in favour of new rental units.

US Renter Household Growth: Full Year 2017

GRAPH CREDIT: [Harvard Joint Center's State of the Nation's Housing Report 2018]

House prices have been outpacing incomes by a lot, particularly for young households, even though the overall homeownership rate is back around 64%. Fewer are buying than in past decades.

Young people as homeowners is about seven or eight percentage points lower than 1988, and huge numbers of millennials are still living with their parents.

At May’s sales pace, it would take 4.1 months to exhaust the current house-for-sale inventory, up from 4 months in April. A six-to-seven-month supply is viewed as a healthy balance between supply and demand. The median house price increased +4.9% from a year ago to an all-time high of US$264,800 in May. That was the 75th consecutive month of year-on-year price gains.

Harvard’s housing researchers have lowered their household growth expectations for the next decade by 1.6 million due to the prospect of reduced immigration. The change in the housing demand outlook is based on an expected dip in foreign immigration to the US and higher mortality rates among native white residents.

NAHB Chief Economist Analysis Highlights

  • The annual increase in permits, housing starts, and completions signals relief from the housing shortage and sends an optimistic message about the housing market.
  • In May, the overall pace of housing starts, at 1.35 million units, is a +5% increase from the previous month. Based on the less volatile three-month moving average, the volume of total residential (single- and multi-family) housing starts is 18,000 more than April 2018, and 167,000 units higher than a year ago.
  • Housing starts are an important source of future supply as the housing market continues to face a supply constraint problem. (The supply constraint was discussed in the NAHB Real House Price Index (RHPI)).
  • An estimated seasonally adjusted annualized rate of 1.29 million housing units were completed in May, representing a +10.4% increase from the
  • May 2017 figure of 1.16 million – a modest, yet important, step toward producing enough housing to meet market demand.

US House Prices, Inventory

Home prices across the US jumped +6.9% in April from a year ago, according to the latest monthly value report from CoreLogic, released June 5. While that is slightly less than the +7% annual jump in March, it is still making more and more markets unaffordable.
Of the nation’s 50 largest housing markets, 52% were considered overvalued in April.

High demand and very short supply continue to drive up home prices. The supply of homes has been dropping for three years. While more homes came on the market this spring, they have been selling at the fastest pace on record, according to the National Association of Realtors.
Homebuilders are slowly ramping up production, but most of that is at the move-up or luxury level, not at the entry level, where most of the demand is. Sales of newly built homes fell in April, according to the U.S. Census, even as supplies in that category rose. This is likely because of higher prices.

US Home Affordability : May 2018

GRAPH CREDIT: [US National Association of Home Builders via Bloomberg]

Meanwhile, in May, the median price of a previously owned US homes rose to a record $264,800, NAR data showed Wednesday.
A separate report from ATTOM Data Solutions shows home price appreciation, coupled with rising mortgage rates, have pushed three-quarters of average wage earners out of the market with property costs rising faster than wages in 64% of regions surveyed. Home price appreciation continued to outpace wage growth, speeding up the affordability treadmill for prospective homebuyers even without the rise in mortgage rates, said ATTOM.

Home sales in the US have largely treaded water this year as strong demand depletes the supply of properties on the market, causing house prices to rise faster than wages.

Supply has been especially tight at the lower end of the market, which accounts for a large portion of the housing market. With mortgage rates rising back to seven-year highs, purchasing a home could become even more expensive for first-time buyers. Housing demand is being driven by the lowest unemployment rate in 18 years.

The 30-year fixed mortgage rate rose eight basis points to an average of 4.62% last week, according to mortgage finance agency Freddie Mac. Mortgage rates are likely to rise further after the Federal Reserve increased interest rates last week for a second time this year and forecast two more rate hikes before the end of 2018.

There were 1.85 million previously-owned homes on the market in May. While that was up +2.8% from April, housing inventory was down -6.1% from a year ago.

Supply has declined for 36 straight months on a year-on-year basis.

Houses for sale typically stayed on the market for 26 days in May, matching April’s seven-year low and slightly down from 27 days a year ago. Fifty-eight percent of homes sold in May were on the market for less than a month.

First-time buyers accounted for 31% of transactions in May, down from 33% in both April and May 2017. Economists and realtors say a 40% share of first-time buyers is needed for a robust housing market.

According to the NAR, sales of homes priced below US$100,000 plunged about 18% in May from a year ago.

The number of sales listings has dropped -6.1% over the past year to 1.85 million. That forced would-be buyers to act quickly and sign contracts on average in just 26 days. It also pushed up home values as the median sales price in May rose +4.9% from a year ago to US$264,800.
Due to declining inventories, sales of homes worth less than US$250,000 have dropped over the past year. But in a sign of greater income inequality, sales of homes worth more than US$1 million have surged +14.4% this year.