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Economic Forecasts

Tight Inventory Spurs Prices

Kiplinger's latest forecast on housing starts and home sales

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The housing market this year has shown stronger-than-expected price growth but weaker-than-expected existing-home sales and residential construction.

Look for housing starts to increase by just 1.5% in 2017 from last year, as headwinds continue to hamper the supply of new homes added to the market. Total housing starts fell 4.7% in September to a seasonally adjusted annual rate of 1.127 million. Single-family starts fell 4.6%, while multifamily starts declined 6.2%. Total starts have declined in five of the past six months. Multifamily construction has been falling faster this year than single-family construction has been increasing, leading to a smaller gain in total starts for 2017. Repairs on homes damaged by hurricanes Harvey and Irma may worsen the shortage of skilled labor and drive the price of materials higher in coming months.

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

Price gains picked up in August and will maintain a similar pace for the rest of 2017. The S&P CoreLogic Case-Shiller National Home Price Index rose 6.1% in August from a year ago, faster than the 5.9% increase in July. Seattle led the nation in home-value growth, with prices increasing 13.2% year-over-year. But mortgage rates have begun to rise, which should ultimately put a damper on price gains. The average rate for a 30-year mortgage was 3.94% this week, up from a year ago, when it averaged 3.54%.

The current run-up in home values, while great for homeowners and investors, may pose a hurdle for people looking to buy for the first time, particularly if mortgage rates continue to rise while the supply of homes on the market remains lean.

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Existing-home sales will stay sluggish in coming months as the tight inventory struggles to keep up with demand. They totaled 5.39 million in September, rising 0.7% from August. Existing-home sales are trending down from earlier this year because of the low supply of homes for sale. Inventory in September was 6.4% below a year ago. These sales will rise just 1.3% in 2017, an anemic pace caused by the continuing low inventory.

New-home sales will rise 9% in 2017 as the positive trend continues. They jumped 18.9% in September. New-home sales tend to be volatile, and the strong increase in September is likely to be revised down. Nevertheless, the solid growth in sales in 2017 indicates that demand for new homes is improving.

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