Numbers for the first half of the year don’t indicate a bubble is forming that will soon burst. However, we are entering yet another “new normal.” As should be expected.
There’s a lot of concern that new housing isn’t being built fast enough. Joint data from the U.S. Census Bureau and the U.S. Department of Housing and Urban Development for May 2019 shows:
While we know there is still a pent-up demand for homes, long term we should look at how many new homes will be needed in the next several years. This needs to be based on demographics. Factors like how many more people will need houses versus how many existing and new houses will be available. The two biggest influences are population growth and where the aging baby boomer generation will be living next year and a few years after that.
While we might learn detail that is more granular once the 2020 census is released, current U.S. Census estimates show the population is stagnating. From 2017 to 2018, the U.S. population growth rate was only 0.62%. This is the lowest since 1937. With baby boomers in retirement and millennials still putting off starting families, don’t expect a surge in population any time soon. In fact, the nation’s population under the age 18 has declined since 2010. If we aren’t going to have many new parents in future years, we aren’t likely to have many more home buyers in the future. Additionally, with the leading edge of boomers approaching the end of the expected life span, more existing houses will come on the market to supplement new construction.
Historically, we’ve had to account for immigration as part of the need for additional housing. U.S. immigration policy has changed frequently over the decades and is certainly in flux today. What we do know according to the Migration Policy Institute, immigrants as a percentage of the U.S. population has grown from 11.1% in 2000 to 12.9% in 2010 to 13.7% in 2017. Including these numbers, in the years leading up to 2017, we’ve still seen the population growth rate stagnate at 0.62%.
Based on people who will need homes a few years in the future, the current new construction rates are fully adequate. Just maybe not for our immediate needs…
It’s all about affordability. Whether it’s due to rising interest rates or higher purchase prices, the 2018 spike of 7.6% in values isn’t sustainable. Places like Seattle that overshot affordability are now seeing a price decline. A national home value decline isn’t likely as long as moderate income growth continues. Value appreciation can be expected to stay close to 3.5% (April 2019), which is a slight decline from 3.7% in March of this year.
“For the first time in a long time, we’re starting to see prices correct, And the big thrust that's changing that narrative is the affordability challenge.” - Skylar Olsen, Director of Economic Research at Zillow.
Other key measures support this realignment such as the S&P Case-Shiller Home Price Index, which dropped for the 13th month in a row in April. That index doesn’t mean prices are going down. What it means is prices are going up slower. The trend is home prices are out pacing inflation by about 1.5%. Available inventory levels are expected to continue increasing until wage growth overcomes the affordability problem.
The bottom line for the remainder of 2019 is modest price increases, increasing inventory, and new construction supporting long term housing needs. All creating a balanced market as the latest “new normal.”
The big unknowns in the near term are possibly higher interest rates and a stagnating economy that slows wage growth. A stagnating economy is probably the lesser of the two evils because the employment picture favors workers more than employers. Baby boomers are exiting the employment market at the same time stagnant population growth is bringing fewer workers into the market. Pressure from employee shortages should continue to favor wage increases.
Still, real estate is always about location, location, location. What’s happening at the national level may have nothing to do with what is happening in your town… Where do you think the housing market is going? Please share by leaving a comment. Also, our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions, inquiries, or article ideas to [email protected].