Is the Housing Market Too Hot?

NAHB Chief Economist Robert Dietz recently provided this housing industry overview in the bi-weekly e-newsletter Eye on the Economy.

A number of unsustainable trends have developed in the housing market. The combination of a decade of underbuilding, favorable demographics, historically low interest rates, and a shift in consumer preferences have pushed single-family housing demand to the strongest levels in over a decade.

However, there is simply not enough resale inventory to meet demand. Existing single-family inventory in March stood at a very lean 2.1-month supply — less than half of what a healthy market needs. Consequently, median resale pricing increased 17.2% year over year to more than $329,000. This magnitude of price growth — far in excess of underlying income growth — is not sustainable over the long run.

The best means of protecting housing affordability is to boost inventory by increasing new home construction. Although home building is moving at its fastest pace since 2006, inventory stands at a thin 3.6-month supply. Moreover, inventory and sales of new homes are increasingly coming from homes that have not yet started construction, with this count up 150% over the last year.

With the strong pace of single-family starts, building materials prices continue to rise on short supply. While not limited to lumber, lumber pricing is now up nearly 250% from a year ago, adding close to $36,000 to the average price of a new single-family home.

A recent NAHB survey revealed that as a result of higher material costs, almost half of builders are including price escalation clauses in contracts, 29% are pre-ordering lumber prior to need, and 19% are delaying some building activity.

Given these price increases for materials and existing housing, some analysts are talking about bubbles. However, the market is not in a bubble because this price growth is predominantly driven by lack of supply and true demographic demand (as opposed to loose mortgage underwriting).

Nonetheless, the current pace of housing price growth is pushing affordability down. And clearly, inflation pressures are building in the economy. The question for the Federal Reserve is whether these forces will be long lasting or transitory as the economy restarts after the unusual recession of 2020.