Outlook Positive for New Home Prices

As I have talked with other brokers around the legislative meetings this week, many of the business conversations have gone exactly the same:

Me: “How’s business – what’s happening in your market?”

Every other broker: “We have no inventory, prices are increasing quickly especially at the entry level, and multiple offers are not uncommon.”

With low inventory levels and rising prices in many markets across the country, this morning’s session: “Outlook for Home Prices and Residential Construction” was highly relevant.

NAR Economist Lawrence Yun served as the moderator, with Freddie Mac Deputy Chief Economics Len Kiefer and Ken Simonson, Chief Economist for the Association of General Contractors of America presented their views on the future of the housing market.

Clients often ask me if we are in a new housing bubble, and Kiefer addressed this in his presentation. Two leading indicators of a potential bubble are an overextension of credit and median price growth exceeding median income.

Research shows that when median home prices are more than 4. 1 times the median income, there is potential for a price correction. In many markets, such as the Portland metro market where I work, we have already exceeded that and are continuing to climb. The median sales price in Portland is 5. 3 times the median income.

However, because of the low cost of credit over the last few years and the equity gains many homeowners have had over the last few years, while the total value of real estate has increased significantly, total mortgage debt has been relatively flat.

Non-housing debt service is also relatively low, so in the aggregate Americans have the capacity to continue to buy real estate even with higher prices and rising interest rates.

The profile of mortgage applicatants are also very strong, reducing the risk of collapse like the one we witnessed in 2007.

In summary, Kiefer sees very little risk of a burst in the current housing market.
Simonson focused on the levels of construction activity and construction employment.
While both activity and employment levels have increased, they continue to lag behind the peaks for residential construction. In spending terms, residential construction is 21% below the previous peak, which occurred in 2007. Residential employment is 19% below the previous high.

This does not come as a surprise to anyone who does anything with new construction, as finding labor has become increasingly difficult. As labor costs increase, contractors will find their margins getting squeezed and will either have to increase productivity or raise prices. This will make building new, affordable homes even more of a challenge.

In general, all economists agreed the short-term outlook for home prices is good. There are some challenges in new home construction, specifically workforce. In his closing remarks, Lawrence Yun announced that NAR is going to begin putting together information for local governments on the importance of home construction for stable real estate markets, including suggestions like zoning and permitting adjustments and workforce development ideas that could help builders bring more inventory to the market.

John Blom

John Blom is a managing broker of Hasson Company, REALTORS® in Vancouver, Washington. He was also a member of the 2017 NAR Leadership Academy and is passionate about taking the leadership skills he has gained through volunteering with his state and local REALTOR® association out into the community. In addition to serving on several non-profit boards during his eight-year real estate career, last year he ran and was elected for a seat on the Clark County Council. John has always had a passion for public policy. After earning his master’s in history from Ohio University, he spent four years as a historian/analyst for the U.S. Army’s Combat Studies Institute. When one of his fellow brokers heard about this interest, she encouraged him to join the local association government affairs committee. From that point, he was hooked. He has served on national, state, and local policy and REALTOR® Party committees. Talking about advocacy, John says, “We need to always be connecting the stories to the policy. Flood insurance isn’t just numbers on an actuarial table, it is people’s lives. We can’t get lost in the policy and forget the people it impacts.” Beyond real estate and his role with the county, John enjoys spending time with his wife and two kids, rock climbing, and training for obstacle course races. He and his wife have completed two Spartan races this year and completed the “tri-fecta” in Sacramento last fall.

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