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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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Inflation 1.4% in '17, down from 2.1% in '16 More »
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Total housing starts rebounded in June, signaling positive momentum for residential construction in the second half of the year. Housing starts rose to a seasonally adjusted annual rate of 1.215 million in June, a rise of 8.3% from May. Gains were seen in both single and multifamily starts. Growth in residential construction is likely to persist in the next couple of months, since new housing permits also increased significantly last month. Permits for future construction climbed 4.1% for single-family homes and 13.9% for multifamily projects.

The trend in new-home sales has given confidence to home builders that demand for new single-family homes is robust. This has led to a rise in the supply of new homes this year, although the new-home inventory remains relatively low by historical standards. Home builders can’t ramp up single-family construction fast enough because of a shortage of skilled workers and an increase in development costs, including higher land prices and more burdensome land regulations.

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

Existing-home sales declined again, amid low inventory. Sales fell 1.8% in June and were 0.7% above a year ago. The low inventory of existing homes is holding back sales. Investors snapped up single-family properties early in the recovery, taking many lower-priced homes off the market. The inventory of existing homes for sale declined 0.5% in June and remains 7.1% lower than a year ago. The lack of inventory is most acute among lower-priced homes. Sales of properties priced below $100,000 have declined 9.3% over the past year, while sales of homes priced between $100,000 and $250,000 have increased just 0.1%. By contrast, sales of higher-priced homes have risen much faster.

House-price gains have softened recently, but they should continue to climb at about the same pace through 2017. The S&P CoreLogic Case-Shiller national home price index rose 5.6% in the year ended in May, identical to the increase reported in April. Despite the flattening of price growth in recent months, the small supply of existing homes for sale and insufficient single-family construction will continue to put upward pressure on prices.

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