Demand Outstrips Housing Supply in 2017

Demand Outstrips Housing Supply in 2017

Existing-home sales saw a slight decline in December. With a seasonally adjusted annual rate of 5.57 million, sales fell 3.6 percent from November, but sales are still 1.1 percent higher than a year ago. What’s more, home sales for 2017 were higher than at any time in the past 11 years, according to the National Association of Realtors (NAR), setting a sales pace not seen since 2006, a record-setting year.

Year in Review
Homeowners benefited from the strong market, as most saw substantial wealth gains. There were also fewer distressed homes available for sale. According to Lawrence Yun, chief economist for the NAR, “Existing sales concluded the year on a softer note, but they were guided higher these last twelve months by a multiyear streak of exceptional job growth, which ignited buyer demand.” Sales would have been higher, he adds, but a lack of inventory and poor housing affordability meant that the overall sales pace for the year was somewhat muted.

High Demand Fuels High Prices
The same problems that plagued the housing market all year—supply shortages and high prices—continued into December, affecting the number of closings. More buyers were looking than there were homes available for sale. Housing inventory in December fell 11.4 percent. With 1.48 million existing homes on the market, the current supply is 10.3 percent less than at the same time last year. Inventory has fallen year over year for the past 31 consecutive months. At the current sales pace, unsold inventory would be gone in just 3.2 months, down from 3.6 months a year ago. This is the lowest inventory level recorded by the NAR since 1999, when inventory tracking first started. According to Yun, “The lack of supply over the past year has been eye-opening and is why, even with strong job creation pushing wages higher, home price gains—at 5.8 percent nationally in 2017—doubled the pace of income growth and were even swifter in several markets.”

Priced Out
The improving economy bodes well for the coming year, as does rising wages. This should lead to more interest from first-time buyers. But for these buyers to find a foothold in the market, inventory levels need to improve. Otherwise, the lack of inventory will lead to higher prices, which, when combined with higher mortgage rates, will lead to declines in housing affordability, keeping first-time buyers trapped in the rental cycle.

Regional Breakdown

Northeast: Existing-home sales annual rate of 740,000; a decrease of 7.5 percent from November 2017 and 2.6 percent from December 2016

Midwest: Existing-home sales annual rate of 1.33 million; a decrease of 6.3 percent from November 2017 and an increase of 1.5 percent from December 2016

South: Existing-home sales annual rate of 2.3 million; a slight decrease of 1.7 percent from November 2017 and an increase of 3.1 percent from December 2016

West: Existing-home sales annual rate of 1.2 million; a decrease of 1.6 percent from November 2017 and 0.8 percent from December 2016