Taking the Long View on Recovery

Home sales are sputtering because of a lack of inventory.

July 16, 2014

No industry is more cyclical than the housing sector. Changes in job growth and mortgage rates can have a big impact on whether home sales rise or fall. Today, after two years of solid growth, home sales appear to be hitting a soft spot. But that doesn’t necessarily mean the recovery is over.

Compared with previous cycles, hitting a soft spot only two years into a recovery is unusual. That’s because the country’s steady population growth typically boosts demand for home sales after a  downturn. We saw this in the three housing recoveries since 1970. These recoveries were multiyear phenomena of seven, five, and 14 years (the boom).

This time, the expansion seems to be sputtering after only two years. Why? It doesn’t appear to be a lack of demand. We’ve seen a build-up of potential buyers from the creation of 2.4 million jobs over the past 12 months, as well as continuing low interest rates (4.2 percent as of early summer), and the pent-up demand from young adults living at home longer or doubling up with friends.

The difference between this and previous recoveries is on the supply side. There simply isn’t enough inventory to keep the market growing. Just to keep pace with the growing U.S. population, we would need to see about 1.5 million housing starts a year, but since the downturn, we’ve seen the construction of new homes at levels well below half that.

Fortunately, we’re starting to see more homes being listed for sale. March and April inventory levels were higher this year compared with last year, and homebuilders are increasing their activity.

To be sure, the affordability side continues to face pressure. Home prices have been rising throughout the recovery, and credit standards remain tight. But there’s good news on both fronts. As more homes come on the market, the pressure on prices should moderate, and we expect future price gains to be in line with income growth. And we see signs lenders could dial down credit standards to more normal levels, in part because of the strong performance of mortgages originated in the last few years.

Therefore, all in all, a multiyear housing market recovery is still in the works if we discount the modest slowdown for this year.

Lawrence Yun
Chief Economist and Senior Vice President of Research at the National Association of REALTORS®

Yun oversees and is responsible for a wide range of research activity for the association including NAR’s Existing Home Sales statistics, Affordability Index, and Home Buyers and Sellers Profile Report. He regularly provides commentary on real estate market trends for its 1.3 million REALTOR® members.

Dr. Yun creates NAR’s forecasts and participates in many economic forecasting panels, among them the Blue Chip Council and the Wall Street Journal Forecasting Survey. He also participates in the Industrial Economists Discussion Group at the Joint Center for Housing Studies of Harvard University. He appears regularly on financial news outlets, is a frequent speaker at real estate conferences throughout the United States, and has testified before Congress. Dr. Yun has appeared as a guest on CSPAN’s Washington Journal and is a regular guest columnist on the Forbes website and The Hill, an “inside the beltway” publication on public affairs.

Dr. Yun received his undergraduate degree from Purdue University and earned his Ph.D. from the University of Maryland at College Park.

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