This Seller’s Market Is the Canary in the Coal Mine

Sales are up 6.1 percent in February, but what looks good on paper is a bit of a catch-22 where the heightened sales pace only exacerbates the constraint on housing supply
By Genevieve Smith

Reaching a low point in the first quarter of 2017, U.S. home inventory has declined year-over-year for 21 consecutive months.

Lawrence Yun, the National Association of Realtors chief economist, says closings retreated in February as too few properties for sale and weakening affordability conditions stifled buyers in a majority of the country. “Realtors are reporting stronger foot traffic from a year ago, but low supply in the affordable price range continues to be the pest that’s pushing up price growth and pressuring the budgets of prospective buyers,” Yun said. According to the NAR, total housing inventory increased 4.2 percent in February, but remained 6.4 percent below the level a year ago.

“Newly listed properties are being snatched up quickly so far this year and leaving behind minimal choices for buyers trying to reach the market,” Yun said. Data from the NAR shows homes stayed on the market for 45 days in February, down from 50 days in January and 59 days during the same month a year ago. Some 42 percent of homes sold in February were on the market for less than a month, compared with 38 percent of homes sold in January.

This low supply is, of course, driving up the price of available stock. The median existing-home price for all housing types in February was $228,400, up 7.7 percent from February 2016 ($212,100). February’s price increase was the fastest since last January (8.1 percent) and marks the 60th consecutive month of year-over-year gains.

However, Trulia notes that not all home price data is created equal. The Trulia Inventory and Price Watch is an analysis of the supply and affordability of starter homes, trade-up homes, and premium homes currently on the market, and there is good reason for the segmentation of the data. Home seekers need information, not just about total inventory, but about inventory in the price range they are interested in buying. As an example, the Trulia analysis offers that changes in total inventory or median affordability don’t provide first-time buyers useful information about what’s happening with the types of homes they’re likely to buy, which are predominantly starter homes.

According to the National Association of Home Builders/Wells Fargo Housing Market Index (HMI), builder confidence in the market for newly-built, single-family homes jumped six points to a 71. This is the highest reading since June 2005.

Both jobs and incomes are growing, suggesting an improving market for new single-family construction. But here is the rub: What kind of single-family housing should this be? Builders continue to face a number of challenges, including rising material prices, higher mortgage rates, and shortages of lots and labor. The HMI also benefited from unseasonably warm weather at the start of 2017, improving both demand and construction conditions.

With obvious trials and tribulations ahead, it only makes sense that builders would focus on premium products, where buyers are likely to be highly-qualified. So, it’s not surprising that the data supports that theory. The number of starter homes on the market dropped by 8.7 percent, while the share of starter homes dropped from 26.1 percent to 25.9 percent. Starter homebuyers today will need to shell out 2.9 percent more of their income towards a home purchase than last year. The number of trade-up homes on the market decreased by 7.9 percent, while the share of trade-up homes dropped from 23.9 percent to 23 percent. Trade-up homebuyers today will need to pay 1.6 percent more of their income for a home than last year. The number of premium homes on the market decreased by 1.7 percent, while the share of premium homes increased from 50 percent to 51 percent. Premium homebuyers today will need to spend 0.6 percent more of their income for a home than last year.

However, there’s a big point of contention not in focus or even much discussed. Millennials, the largest living generation, provide a huge opportunity for homebuilders who choose to develop starter homes in quantity rather than focusing on limited premium homes of quality.

According to Meyers Research, 55 percent of millennials want to buy in the next 1-5 years. Thirty percent said they want to purchase a home in the next 1-3 years, and 25 percent want to own in 3-5 years. Extrapolating the survey to the larger population, this means nearly 25 million millennials plan to purchase over the next 3 years. That means there is a call for 25 million starter homes and they will not be looking for premium product; they need a starter home. Builders who realize this now will be ahead of the game.

 

Genevieve Smith is the Editor of Builder and Developer magazine. She may be reached at gen@penpubinc.com.

 

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