By James Chessen and Curtis Dubay
On almost every front, the economy is growing strong. GDP is growing at a faster clip than it has in several years, supercharged by the tax bill enacted with ABA’s support late last year. Over two million jobs were added over the last year, helping to drive up consumer sentiment and spending to near record highs. Even wage growth, which has been slow, is picking up. This is impressive, given that we are now in the 10th year of economic expansion since the end of the Great Recession.
The real estate market, however, continues to lag the broader economy. While there are many regional differences—and even urban, suburban and rural differences—the relatively slow growth in real estate is worth watching as the economy will inevitably cool over the coming months.
Let’s start with the slow recovery in home building since the Great Recession. Single family home starts are still 20 percent below their long-term pre-recession average. Multifamily starts are edging back up to more normal levels, but still lag historic averages. And home sales (both new and existing) remain weaker than they should be given the state of the economy and are far below pre-recession levels.
The short supply has been exacerbated by the lack of construction workers. Nearly 2.3 million construction jobs were lost following the financial crisis, and only 1.86 million jobs have returned to the industry since the low point in January 2011.
Add to this mix the effects of tariffs, which have hit building materials hard and driven up the cost of construction. The lack of developed lots in locations where builders would like to build is not helping either. These factors will likely pinch the lower end of the market the hardest, which is where the demand is coming from as household formation has regained strength.
The tight supply of existing homes for sale and the cost of building new ones is helping drive home prices up and sales down. The Case-Shiller Index, a measure of housing prices, has been steadily rising and year-over-year growth in home values has exceeded five percent over the last three years.
One of the troubling consequences is that home price growth has been outstripping wage growth for some time now, just as it did before the financial crisis (see the chart). Can home prices continue to rise if wages don’t keep up?
The tension will continue to build between the short supply pushing prices up and higher mortgage rates (a consequence of Federal Reserve policy) that typically push prices lower. The limitations on deducting state and local taxes will also affect prices as buyers begin to build into their bids the higher total costs of owning a home. The SALT limitations may have even broader economic effects (particularly in states with high taxes). This outcome may not be fully realized until next April when the federal tax bill is due and the true cost is known.
The bottom line is that the housing market will continue to suffer from tight supplies particularly at the lower price points. This will keep the upward pressure on prices, which will be tamped down a bit by rising mortgage rates.
James Chessen is chief economist at ABA, where Curtis Dubay is senior economist.
