Modest Growth in Sales Despite Strong Economy

New construction is key to inventory woes, but small builders are largely absent, according to NAR's chief economist.

May 17, 2018

By all measures, home sales should be breaking out because of the strong economy but growth is minimal because too few homes are for sale, NAR Chief Economist Lawrence Yun said May 17 at the 2018 REALTORS® Legislative Meetings in Washington.

Yun is predicting a 1 to 2 percent uptick in sales this year, to about 5.6 million units. Given favorable demographic trends and how well the economy is doing, that increase is much more restrained than it could be.

“This is really about lack of inventory,” Yun told thousands of REALTORS® at a residential economic forum he hosted.

The economy is expected to grow about 2.7 percent this year and could reach 3 percent growth in the next two years. Unemployment is shrinking, wages are rising modestly, and stock indexes are at historic highs. And there are no signs growth abate anytime soon.

Persistent low inventories are driving up home prices and making homes increasingly unaffordable for many households. 

Over the last half dozen years or so, home prices have grown 48 percent nationally while wage growth has increased just 15 percent.

New construction is the best way to bring prices down, but the number of new units coming on the market remains historically low (about 1.3 million now, compared to almost 2.5 million in the early 1970s), in part because small builders, who traditionally have built the bulk of housing in the country, are largely absent from the market. They’re having trouble getting construction financing from the community banks they’ve always relied on, and their labor and material costs are going up.

That’s left the market mainly to bigger builders, and they’re focusing mainly on higher end homes. Dannielle Hale, chief economist at realtor.com, who spoke at the forum, said there are 250,000 fewer new starter homes—those under $200,000—than there were three years ago. “New units aren’t helping inventory that much,” Hale said, because the new homes are mainly for move-up buyers.

The best way to bring home price increases down so that they’re more in line with people’s wages is to provide relief to community banks so they can start making construction loans to small builders again, Yun said.

He also said the Trump administration should remove tariffs on any products related to home construction, like lumber.

At the local level, he called on municipalities to relax land use restrictions, modify condominium defect laws, and offer free training in welding, carpentry, and other construction trades for people displaced from other jobs. Modifying condo defect laws would ease the legal threat hanging over builders for minor construction defects.