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Economic Forecasts

Tightening Housing Supply Pushes Up Prices

Kiplinger's latest forecast on housing starts and home sales


GDP 1.4% growth for the year; a 2% pace in '17 More »
Jobs Hiring at 150K-200K/month through '16 More »
Interest rates 10-year T-notes at 1.4% by end '16 More »
Inflation 1.7% for '16, 2.4% in '17 More »
Business spending Flat in '16, slight gain in '17 More »
Energy Crude oil trading from $40 to $45 per barrel in Dec. More »
Housing Prices up 5% in '16, 6% in '17 nationally More »
Retail sales Growing 3.4% in '16 and '17 (excluding gas) More »
Trade deficit Widening 4% in '16, after a 6.2% increase in '15 More »

Low mortgage rates, looser credit and an improving job market are giving more people the means to buy a home this year. But inventory shortages of homes for sale will make it more difficult for first-time buyers to find a home, and for existing homeowners to trade up.

Builders want to ramp up construction of new homes, but they can’t because of a combination of factors that hampers their ability to break ground on new projects. New single-family construction will grow at an annual clip of 10% this year, but even that won’t be fast enough to meet demand. Home builders face several obstacles, such as tighter financing for new construction, a shortfall of buildable lots and a lack of skilled workers. Rising new-home sales give them an incentive to put up as many new homes as they can, but those headwinds will dampen any plans to substantially accelerate the pace of construction. (Sales of new homes surged 12.4% in July, the highest level in almost nine years.)

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Steady demand is pushing down inventories of new and existing homes on the market. Stock of existing homes is dropping all around the country, with inventories down by 10% or more in almost all major metro areas, not just in hot markets of the West and the Southeast. At the current pace, it would take 4.7 months to exhaust the supply of existing homes for sale. Typically, a six-month inventory is considered normal.


Year-over-year supply growth of existing homes for sale has fallen for 14 consecutive months. Decreasing inventory makes existing homeowners reluctant to sell because their choice of homes to buy will be limited, which in turn worsens the lack of homes on the market. The inventory drop is most acute at the low end of the price range, pushing selling prices above asking prices in many cases. The inventory of new homes on the market fell to 233,000 in July, the fewest since November.

Home prices will continue rising at a steady clip nationally through 2016, before picking up even more next year in most of the country because of the low inventories. Robust gains have pushed prices in cities such as Portland, Seattle and Denver above the peak reached during the housing bubble a decade ago. But these gains stem from a combination of strong labor markets and demographic forces — not the same factors that caused the bubble. In fact, double-digit growth in Portland and Seattle may continue for a while yet. Price growth appears to be cooling in San Francisco and Denver, where prices had been rising at double-digit rates for an extended period. The S&P/Case Shiller U.S. National Home Price Index rose by 5.1% in June from a year ago, on par with the increase reported in May.

See Also: Money-Smart Tactics to Prosper in This Hot Housing Market