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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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Demand for housing, driven by gains in the labor market and stronger household finances, is increasing, but limited supply is leading to further price gains across the nation.

Contracts to buy previously owned homes rose in February, as warm weather encouraged folks to shop for houses. The National Association of Realtors reported that its pending home sales index, which tracks contracts signed for purchasing existing homes, climbed 5.5% in February. Actual sales of existing homes stumbled that month, dropping 3.7% from January to a seasonally adjusted rate of 5.48 million. Despite the monthly decline, February’s sales pace was still 5.4% above a year ago. The South was the only region to see a modest monthly increase. Inventory of existing single-family homes for sale remains stubbornly low. As of February, it only took 3.8 months to clear the current supply, a little above the historic low of 3.5 months.

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

New-home sales jumped for the second consecutive month in February, rising by 6.1% to a reported seasonally adjusted rate of 592,000. Stronger buyer traffic has pushed builder confidence to levels not seen in more than a decade, according to the National Association of Home Builders/Wells Fargo Housing Market Index.

Single-family home (SFH) construction continued its solid start to the year. Work on SFHs rose 6.5% in February, while multifamily construction fell 3.7%. Construction of SFHs has continued to strengthen as construction of apartment buildings has slowed down. Applications to build SFHs rose to an annualized rate of 832,000 in February, the strongest level since September 2007. The warmer-than-normal weather likely boosted residential construction activity in the winter. Total building permits, a bellwether for future construction, declined 6.2% because of a plunge in applications for multifamily construction. Single-family permits, however, rose 3.1% in February. Residential construction is improving as a tight job market and healthier finances give folks the ability to buy. At the same time, a shortage of ready-to-build lots and skilled labor continues to pose headwinds for the home building industry.

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Low inventories of homes for sale are driving home prices higher. The S&P CoreLogic Case-Shiller national index rose 5.9% in the year ended in January. Nineteen out of the 20 major metropolitan areas tracked by the index saw prices rise. The tight supply of homes for sale and rising prices may deter some would-be buyers. Higher prices and rising interest rates will weigh on affordability, forcing price gains to level off at some point this year. Interest rates have increased since early November. A 30-year fixed-rate mortgage averaged 4.14% for the week ending March 31. (The average mortgage rate for all of 2016 was 3.65%.)

By the end of 2017, expect the average 30-year fixed rate to rise to 4.6%, with 15-year fixed rates at 3.8%.

See Also: All Our Economic Outlooks

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