It was only a few years ago when the glut of homes for sale was a critical problem for the economy—excess supply and low housing demand sank home values, resulting in a severe home equity hit for homeowners across the nation and plunging millions into underwater mortgages. This contributed to a vicious cycle of foreclosure, which further bloated housing supply and drove real estate values even lower.
The good news is that although foreclosures remain elevated, the housing inventory problem is in the past for most of the nation as an improving labor market and low mortgage rates have revived housing demand. That in turn has positive implications for the job market as another cycle materializes: more jobs in the broader economy fuels more housing demand, and with more housing demand comes more jobs in the housing sector, especially in construction, an industry still languishing in the wake of the bust.
Consider the inventory of existing homes, which totaled more than 4 million at its peak in July 2007, according to the National Association of Realtors. Since then, existing home inventory is down 47 percent, now standing at 2.14 million as of October 2012.
In terms of months' supply—the period of time required to sell through all inventory at current sales rates—the existing home supply has fallen from more than 12 months' supply in July 2010, a spike due to the fall-off in sales when the federal home buyer tax credit program expired, to just 5.4 months' supply in October 2012.
The Census numbers for newly constructed single-family homes are even more dramatic. For-sale inventory of newly built homes—completed and under construction—topped out at 572,000 in July 2006. After the Great Recession and an 80 percent peak-to-trough drop in single-family home construction, new home inventory is now down almost 75 percent to 147,000 units. And the months' supply of new homes is down from 11.6 months in October 2008 to 4.8 in the latest Census report. But of the 149,000 new homes listed as for-sale, only 40,000 are completed, move-in ready homes—another historically low level.
Dwindling inventories are one reason why housing prices are seeing significant price growth in most parts of the country, and why new construction is up for 2012. Both factors have helped housing add about 15 percent to net growth in gross domestic product for the first three quarters, a major reversal considering the sector has detracted from economic growth for the past several years.
With housing demand heating up, confidence among builders is improving according to industry data, which means builders will likely continue increasing construction. That's good news for GDP growth and employment—on average, every new home built keeps three people employed full time for a year. If single-family housing starts increase from 530,000 in 2012 to 640,000 in 2013—a reasonable expectation—housing will generate more than 300,000 jobs next year.
While it is good news that housing inventories are down, the components of current housing demand suggest some caution, primarily because the market is being supported by historic levels of investors and cash buyers. According to the National Association of Realtors, cash buyers made up 29 percent of sales in October, while investor buyers—most of whom are cash buyers, too—accounted for 20 percent of the market. And the share of single-family homes built for rent—now at 6.7 percent—is more than twice the 20-year historical average of about 2.5 percent, a direct result of the reduced levels of traditional buyers.
Such a large share of home sales due to investors and cash buyers is a warning for future housing policy debates, particularly with respect to changes that would raise the cost of buying a home with a mortgage. The future of home ownership and the composition of the middle class will be affected by policymakers' decisions regarding the mortgage interest deduction and the system of housing finance in the United States.
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Robert Dietz is an economist with the National Association of Home Builders (NAHB). Previously an economist with the Congressional Joint Committee on Taxation, Robert writes on housing and policy issues at NAHB's economics blog Eye on Housing. Follow Robert on Twitter at @dietz_econ. The information presented here does not necessarily represent the views of NAHB or its membership.