Low mortgage rates have spurred an increase in mortgage applications (although it should be noted that applications have fallen in the last two weeks) and refinances, but despite these gains, America’s home sales remain below historical averages.
So, what’s the deal? Well, a lack of housing inventory is one big factor. According to a report from Trulia, the U.S. inventory of homes for sale was flat in the first quarter, compared with a year earlier, highlighting a mismatch between buyer demand and housing supply.
Although many factors are responsible for the supply downturn, Doug Duncan, Fannie Mae’s chief economist, attributes the decline to a few specific causes.
In an exclusive interview for the season finale of the Housing News podcast, Duncan sat down with HousingWire to discuss the housing market’s ever-changing landscape and its inventory decline.
According to Duncan, the housing market’s inventory dilemma can primarily be attributed to its changing demographics.
“Housing is primarily driven by demographics. So, the supply that’s needed depends on the number of people and how they form households, and how those households decide to live,” Duncan said. “Today, a summary of housing supply is we’re annually producing probably 300,000 less units of single-family [housing] and apartments, then we should, given our current demographic profile.”
Duncan says this is because America’s seniors are now choosing, more than ever, to age in place.
“At a very high level, the Boomers are doing what they said they were going to do, and are aging in place,” Duncan said. “Gen Xers who took the biggest damage in the downturn are also staying in place [in homes] where they own the land, and are tearing the roof off of the house, and putting on another floor. So, they’re not adding to the existing supply.”
Data backs up Duncan’s points. Instead of moving to retirement communities like many of their parents, data from a recent Freddie Mac study indicates that more Baby Boomers are opting to age in place. According to the GSE, the “near-gridlock” is keeping about 1.6 million houses off the national market.
This vacuum has led to an uptick in home price appreciation, as Duncan notes that homebuilders have yet to build a significant amount of affordable entry-level homes.
In August, the National Association of Realtors revealed that the nation’s lack of housing inventory was starting to weigh heavily on home prices, as the organization determined that 93 out of 178 housing markets experienced price appreciation of 5% or higher in Q2.
NAR Chief Economist Lawrence Yun said in order to prevent greater price appreciation in more affordable metros, homebuilders needed to bring more homes to the market.
“New home construction is greatly needed; however, home construction fell in the first half of the year,” Yun said. “This leads to continuing tight inventory conditions, especially at more affordable price points.”
So, if the demand for housing is strong, then why aren’t builders simply creating more homes? Well, Duncan says, it has a lot to do with the industry’s job market.
“During the crisis, we went from building 2.2 million units a year to 600,000. And we stayed at that low level for about three years. So, all the labor that would have been used in building the 2.2 million net of the 600,000 had to find someplace else to go,” Duncan said. “Some of it retired, some of it went home to its own country, some of it went into other jobs. So, for that long time period, those people have now gone into something that’s more sustainable for them longer term.”
The latest Housing Market Index, produced by the National Association of Home Builders and Wells Fargo also attributes labor concerns as a deterrence to the market’s growth.
“Even as builders report a firm demand for single-family homes, they continue to struggle with rising construction costs stemming from excessive regulations, a chronic shortage of workers and a lack of buildable lots,” NAHB Chairman Greg Ugalde said.