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Following a two-year recovery in home sales and prices, the market is pausing in 2014, beginning with weak sales in the first quarter. However, inventory conditions continue to favor sellers in most of the U.S., so home prices are showing strong growth. A gradual sales improvement is expected over the course of the year, but the total volume should be slightly below 2013.
The housing market is experiencing a push-pull phenomenon. Expected job growth and a pent-up demand should pull sales up, but there are ongoing frictions: tight credit, limited inventory in many areas, rising prices and higher interest rates. In addition, high debt loads mean some younger buyers are postponing a home purchase.
New home construction has been trending up, which is necessary to alleviate the housing shortages in many areas. Even with a pick-up in building activity, housing construction needs to rise 50 percent over current levels to meet the underlying demand.
With rising construction and a slight decline in home sales, the balance between home buyers and sellers is expected to improve, but will still favor sellers in much of the country. After jumping 11.5 percent in 2013, the median existing-home price should rise more moderately this year, in the range of 5 to 6 percent.
Housing affordability conditions are down from a record in 2012, when the typical household had almost double the income needed to buy a median-priced home. Rising prices and higher interest rates have outpaced modest gains in income, but affordability remains broadly favorable for most of the U.S. Conditions are weaker in high-cost housing markets that continue to experience double-digit price growth.
- Distressed property, foreclosures and short sales, are on a sustained decline and are expected to be a single-digit market share this year. According to CoreLogic, 4 million homeowners, who owned more than their homes where worth at the end of 2012, were in a positive equity position at the end of 2013 because of rising values.
Between 2011 and 2013, existing-home sales rose 19.5 percent. Resales in 2013 marked a solid recovery and reached 5.09 million, the highest since 2006. Based on population and underlying demand, existing-home sales should be in the range of 5.0 to 5.5 million. After declining slightly this year, sales are expected to grow in 2015 and reach the 5.2 to 5.3 million range.
The median existing-home price rose 18.7 percent between 2011 and 2013, reaching $197,100. While this remains below the peak of $221,900 in 2006, the rise in values translated into an additional $4 trillion in housing wealth recovery. The rate of price growth in 2013 was the strongest since 2005.
Housing starts, which had fallen to a record low in 2009, nearly one-third of normal, began to notably improve in 2012, but were still only about half of the long-term normal level of 1.5 million. New-home construction has stayed on an upward path, reaching nearly two-thirds of normal in 2013, but is expected to rise strongly in both 2014 and 2015.
This means construction should get close to underlying demand in 2015, which would help to bring supply and demand into roughly balanced conditions in much of the U.S., and allow home price to rise at normal rates.
There is a pent-up demand for both home buying and rentals from an unusual slowdown in household formation. Over the past decade, the U.S. had added about 3 million people each year to its total population. When young people leave their parent’s home and strike out on their own, generally as renters, new households are formed; the average is 1.1 to 1.2 million new households each year. When the economy fell in 2007, household formation plunged to only half of the normal rate and remained at those suppressed levels for five straight years.
Instead of living on their own, many young people moved back home after college, or never left in the first place. Others doubled and tripled-up with roommates, so a very large demand began to build.
At last, with job growth and rising consumer confidence in 2012, household formation came roaring back to about 80 percent of normal. That sparked a two-year recovery in both home sales and rentals. Unfortunately, household formation fell back in 2013, mostly due to sub-par job growth in the first half of the year, especially in the kinds of jobs that give people the wherewithal to get into the housing market. Job growth returned in the later part of 2013; sustained job creation is the key to a recovery in household formation and the housing market.
Related Talking Points
- Distressed Properties: Foreclosures and Short Sales
- Housing Affordability
- Mortgage Availability and Credit Issues