2018 Housing Report Card: Good, But Needs Improvement

Housing Affordability Issue Continues to Grow

According to the 2018 single-family permit numbers, Minnesota homebuilders had their second-best year in a decade. But, those numbers seem more disappointing coming off 2017, which was the best year for new housing construction since the Great Recession.

Minnesota single-family permits were down 3 percent year-to-date through October, but according to the Minneapolis Area Association of REALTORS (MAAR), new construction pending sales through October were up 7.8 percent.

While some indicators point to the existing housing market shifting from a seller’s to a buyer’s market, the inventory of homes for sale is still at record lows. Therefore, prices continue to rise, homes are selling in less time and sellers are yielding a higher share of their list price.

“The market is seeing continued strength, mostly across the board. But the strongest performance the last few years was in the more affordable price points,” said David Arbit, MAAR director of research and economics. “The inventory shortage continues to weigh on would-be buyers.”

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Townhomes Surge Ahead

One of the bright spots in the market was the growth in townhome construction. Pending sales of newly built townhomes were up 13.7 percent while the number of permits pulled year-to-date for townhomes were up 23 percent.

The rise in townhome construction is a clear sign that builders are trying to reach a larger share of the market. Townhomes appeal to both first-time homebuyers looking for a more affordable home and baby boomers looking to downsize.

Builder Confidence Drops

Homebuilder confidence took its deepest plunge since 2014 in November. According to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI), builder confidence in the market for newly-built single-family homes dropped eight points to 60. This was a sharper month-over month decline in sentiment than during the Great Recession.

“For the past several years, shortages of labor and lots along with rising regulatory costs have led to a slow recovery in single-family construction,” said Robert Dietz, NAHB chief economist. “While home price growth accommodated increasing construction costs during this period, rising mortgage interest rates in recent months coupled with the cumulative run-up in pricing has caused housing demand to stall. As a consequence, builders have adopted a more cautious approach to market conditions.”

Still, any index number over 50 indicates that more builders view conditions as good than poor. Builders are noting that consumer demand for new homes is still there, but that homebuyers are taking a pause due to concerns over rising interest rates and home prices.

Regionally, looking at the three-month moving averages for HMI scores, the Midwest edged one point lower to 57. The Northeast rose two points to 58, the South declined two points to 68, and the West dropped three points to 71.

Rising Mortgage Rates Impact Housing

Rising interest rates are now clearly taking their toll on potential homebuyers. Mortgage applications dropped to a four-year low in November after interest rates hit an eight-year high. According to the Mortgage Bankers Association, the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($453,100 or less) increased in November to the highest rate since April 2010.

“Rates increased slightly in November, as various job market indicators showed a bounce back in job gains and an acceleration in wage growth in October,” said Joel Kan, Mortgage Bankers Association’s associate vice president of economic and industry forecasts. “Application activity decreased over the week for both purchase and refinance applications, with the overall market index down to its lowest level since December 2014.”

As mortgage rates have climbed so have home prices. Which means thousands of additional homebuyers have now been priced out of the market.

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Affordability Biggest Challenge Ahead

Jobs are good, unemployment continues to drop, consumer confidence is at high levels, yet housing continues to lag behind.

Homebuilders, developers and their partners are stuck in the throes of rising construction and regulatory costs. These costs are constricting supply and causing home prices to climb higher.

A new nationwide survey conducted on behalf of the NAHB reveals that nearly three out of four American households believe that the nation is suffering a housing affordability crisis, and a majority of respondents reported this is a problem at their local and state level as well.

Analysis from Freddie Mac shows that nationally 370,000 fewer units were built in 2017 than needed to satisfy demand.

“If supply continues to fall short of demand, home prices and rents are likely to outpace income and household formation will fail to reach potential,” said Sam Khater, chief economist at Freddie Mac. “The inadequate level of U.S. housing supply is a major challenge facing the housing market in 2018 and likely for years to come.”