Nothing describes the current state of the housing market better than the phrase, ‘more buyers than sellers’. The current imbalance between supply and demand has placed upward pressure on prices, resulting in a 5.75% increase year-over-year as measured by the S&P/Case-Shiller 20-City composite. The January report marked the 44th straight month of year-over-year increases in the index, which is now only 11% off pre-crisis levels. The early phase of the recovery was driven by price increases where the downturn was most severe, but later stage expansion has been marked by steady demand combined with a 22 year low in inventory levels.
Through the first three months of the year, mortgage purchase applications were 25% higher than last year, and on pace to deliver the highest annual volume post-crisis. The surge in demand has been fueled by fundamental factors including, most notably, steady gains in employment, affordability and an uptick in household formations driven by demographics. Millennials, the largest generation in American history, are currently in the steepest part of the homeownership curve (Chart 1). Although homeownership has been delayed by historical standards, millennials are being pushed into the market by soaring rents, driven by a 30-year low in rental vacancy rates. In 2015, we saw a positive correlation between home price appreciation and the share of the population between the ages of 18 to 34. Austin, Texas, with the highest millennial population among metro areas at 17%, and an unemployment rate of just 2.6%, recorded a 9% spike in prices last year. In contrast, Cleveland, Ohio, with a millennial population of just 12.2%, and unemployment rate of 7.1%, saw a 2.9% increase in prices from last year.
Single-family homes available for sale, or visible inventory, fell to 1.55 million units at the end of 2015, their lowest level since 1994 (Chart 2). Factors limiting the activity of existing homeowners stem from the crisis and include reduced job mobility, stagnant wages, depressed home equity levels, and the inability of many homeowners to qualify for new purchases under tighter underwriting standards. A second source of supply is the construction of single-family homes, which historically has risen as demand has remained robust. However, homebuilders have gravitated to the construction of multi-family dwellings, given lower price points and a desire to satisfy growing demand for rentals. The construction of multi-family units is now above pre-crisis levels, in contrast to single-family starts, which are running 50% below pre-crisis levels. A third source of supply is the pipeline of delinquent loans that generated a shadow inventory in excess of 8 million units immediately following the crisis. Despite this one-time overhang to the market, shadow inventory has been reduced by almost 70% to less than 3 million homes, with the majority of the remaining loans residing in states where the judicial systems tend to slow the foreclosure process.
2016 and beyond
Looking forward, the supply and demand imbalance is likely to persist, which should translate into expected price appreciation of 3% to 6% annually over the next few years, according to the majority of housing analysts. Compared to previous years, the range of forecasts has narrowed with few outliers, but risks still remain as underwriting standards remain tight by historical standards and wealth dispersion has increased. We also caution that the lack of inventory continues to be a tailwind for home prices, but at the expense of activity which remains below pre-crisis levels. The primary offset to these risks remains affordability metrics, which continue to be attractive and supported by record-low mortgage rates.