A shortage of entry-level homes will stymie the housing market this year, nullifying much of the impact of lower mortgage rates, according to a forecast by Diane Swonk, Grant Thornton chief economist.
The dearth of affordable homes is a hangover from the Great Recession, made worse by the current high costs of construction and shortage of cheap labor, said Swonk, a longtime advisor to the Federal Reserve Board and a former member of both the White House’s Council of Economic Advisers and the Congressional Budget Office.
“The escalating costs of materials have triggered production cuts; recent tariffs on imported materials, like lumber from Canada, have also pushed up costs at the same time that labor shortages have intensified,” Swonk wrote in her report. “The cheap labor - immigrants - that once made new housing affordable has all but disappeared.”
Measuring the ratio between housing starts and household formation, Swonk concluded “underbuilding” is the worst since the 1970s recession.
In a separate report, the Department of Housing and Urban Development and the Department of Commerce said Friday that housing starts in March fell to the slowest pace in almost two years. Residential starts slumped 0.3% to a 1.139 million annualized pace after a downwardly revised 1.142 million rate in the prior month.
"The housing market will tread water in 2019 as supply constraints and affordability problems offset any gains from slightly lower mortgage rates," Swonk said.
High home prices are just one factor keeping young buyers from stepping onto the lowest rung of the housing ladder, she said. Millennials graduated from college during the Great Recession and the years of subpar growth that followed, which impacted the trajectory of their earnings, Swonk said. They’ve also taken on a record level of debt to pay for their education, which has caused them to delay starting families and buying homes, she wrote.
“Those delays were not a preference but a consequence of the Great Recession,” Swonk said. “They are not the generational lifestyle choice that marketers are selling.”
Swonk said she expects the growth in the median price of a U.S. existing home to slow to 3.5% this year, compared with 4.8% in 2018. Combined sales of new and existing homes probably will total 5.93 million in 2019, down from 5.96 million last year.
If towns and cities don’t loosen regulations on new construction, if tariffs aren’t address and if the student debt continues to escalate, next year’s housing market may see bigger declines, she wrote.
"The canary is still singing, but without some major changes to zoning laws, construction costs and changes in how student debt is serviced, the music could come to an end in 2020," Swonk wrote.