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Economic Forecasts

Inventories Tight as Housing Demand Grows

Kiplinger's latest forecast on housing starts and home sales

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Residential construction is growing at a steady clip, while a tight job market and healthier finances give more folks the ability to buy new homes. Housing starts declined 7% in March to a seasonally adjusted annual rate of 1.215 million, but they were still up 9.2% compared with March 2016. The warm winter is likely behind the monthly decline in March, since builders probably moved some construction forward to January and February to take advantage of mild weather. And despite the March decline, builders continue to add inventory, with both permits and building completions on the rise.

Nevertheless, a shortage of ready-to-build lots and skilled labor will continue to pose headwinds for the industry. Also, the Department of Commerce’s recent move to impose a tariff on lumber imports from Canada will raise costs for builders of new single-family homes.

See Also: A Housing Shortage Looms as Builders Can't Keep Up

New-home sales have increased since 2010, indicating that the new-home market remains in a long-term recovery. The low inventory-to-sales ratio is the result of strong demand for new homes, which is pushing up sales faster than builders can deliver new homes. The Mortgage Bankers Association’s purchase mortgage applications index, a measure of demand for residential mortgages, has been slowly rising over the past couple of years. And as more folks become interested in purchasing a home, builders should have the confidence to add more inventory, especially of single-family properties.

Sales of existing homes got a good boost in March because more folks put their homes on the market. Existing-home sales rose 4.4% to a seasonally adjusted annual rate of 5.7 million. Listings for existing homes came in at 1.83 million, up from February but still down from a year ago. Low inventory of existing homes for sale means that properties that do get listed spend very little time on the market before they’re snapped up by buyers. Homes stayed on the market for an average of just 34 days in March, down from 45 days in February and 50 days in January.

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Tight supply and steady gains in home sales are pushing home values higher. The S&P CoreLogic Case-Shiller national index rose 5.8% over the 12 months ended in February. Despite the steady gains in overall home prices in recent years, price growth has cooled off for luxury homes. Prices of homes in the top 5% of the market increased by only about 1% annually over the last couple of years, according to Redfin, a national real estate brokerage. By contrast, houses in the bottom 95% of the market saw prices increase about 5% annually over the same period.

See Also: All Our Economic Outlooks

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