Any novice economist can explain the law of supply and demand. When demand is high and supply is low, prices will rise. And so it is for today’s housing market.
“It’s a simple but powerful fact: Housing demand exceeds supply,” is the opening line in Arch MI’s summer 2018 Housing and Mortgage Market Review. The report goes on to point out that “demand really exceeds supply at the lower end of the market, where first-time homebuyers typically start out.”
Currently, the number of homes listed for sale is at a record-low since tracking began in the 1980s. However, the population has increased by 40 percent since the 1980s. Listings are beginning to pick up, according to Arch MI, but they still remain historically low.
The report expects about 1.3 million new housing units—both single- and multifamily—to hit the market this year. However, it indicates that demand will exceed, reaching about 1.5 million units.
Single-family home construction is lagging behind multifamily construction in recovery, according to the report.
“One way to summarize the current bottlenecks in construction is the four Ls: Labor, Lots, Lumber, and Loans,” the report read.
Labor shortages stem from slower immigration and more attractive employment options in other sectors of the economy. In particular, “it has become increasingly difficult to attract young workers,” it indicated.
As for lots, they “are hard to come by,” the report stated. Job opportunities tend to be clustered in large cities, where unused land is scarce. Additionally, infrastructure spending is lacking, stalling freeway projects that could connect new homes to new jobs.
Housing construction has also become more expensive due to increases in lumber costs, which are almost double of what they were a year ago, according to Arch MI. The culprit here, the report says, is the 2017 tariffs on Canadian softwood.
Lastly, loans for land and construction are hard to come by these days as “regulators continue to frown on lenders expanding quickly in this area, even though the data clearly suggests we have a housing shortage,” the report stated.
With demand high and supply stubbornly low, Arch MI predicts rising home prices across the nation over the next two years. The Arch MI Risk Index measures the likelihood of a home price decline in all 50 states and major metros. The index determined a 95 percent chance of rising home prices at the national level over the next two years, which matches the index level from the first quarter of the year.
The index predicts price increases in all 50 states over the next two years.
The state most likely to experience a price decline is Alaska, which has a 27 percent chance of a price drop—of any magnitude—over the next two years. West Virginia (22 percent), North Dakota (20 percent), Wyoming (19 percent), and Texas (16 percent) are the next-most-likely to experience a price decline.
However, “risks in these areas are trending down and these states’ housing markets are likely to continue to improve, thanks to higher oil prices,” the report stated.
Texas made the list due to the fact that home prices in the state are higher than expected compared to historical home price and income differences while “affordability continues to deteriorate at a rapid rate,” according to Arch MI.
To find out more about anticipated price increases and decreases in your state and metro, click here.