Published in The Hill
Existing-home sales declined five out of six months in 2018 and are down 2.2% on the year. Given the strong economic backdrop, that should not be happening.
Nearly 5 million net jobs have been created over the past two years, and the unemployment rate is below the number, according to economic textbooks, that is considered full employment in a free-market society. Help Wanted signs are everywhere, and job openings at times exceed the number of those unemployed seeking work.
Companies are trying desperately to hold on to existing workers, as evidenced by rising wages, and there are historically low filings for jobless benefits by recently fired employees. Companies can easily afford this, as corporate profits have soared, especially after the big cuts to corporate tax rates.
The aggregate wealth of the country surpassed the $100-trillion mark for the first time in early 2018, as both home prices and stock prices set new highs and continue to do so. For comparison, the pre-recession total wealth was $67 trillion in 2007 before sliding to $55 trillion at the depths of the recession in 2009. With so much wealth and so many jobs, home sales should be heading higher.
One reason for lower sales may have to do with tax reform. The potential eliminations to the deduction of mortgage interest and property taxes were a big concern to the National Association of Realtors (NAR). However, the tax bill passed with a sizable allowance for mortgage interest deduction (up to $750,000 in newly originated mortgages and grandfathered the old ones at $1 million).
Property tax is often the biggest portion of overall state and local taxes, but up to $10,000 can be deducted. NAR calculations show that over 90 percent of homeowners and homebuyers would be fully able to deduct both mortgage interest and property tax if they wanted to.
The tricky part, however, is that far fewer households will be itemizing their tax returns, as the number of filers using simpler and larger standard deductions will grow. In other words, there is a less compelling case to buy a home to get a tax break.
More Americans are getting a break whether they buy a home or stay a renter. Interestingly, in a recent survey of realtors, when asked about their clients, only around 10% mentioned their clients expressing concerns over changes to real estate tax breaks.
So what’s really behind falling home sales when the economy is rolling along nicely and real estate-related tax benefits are not a strong issue for most Americans? The answer is the acute shortage of housing supply. Inventory levels have fallen for three straight years and for eight of the past 10 years.
From an oversupply condition of a 12-month supply of homes for sale at the depth of the downturn, it would now only take 4.3 months to exhaust the total inventory of homes for sale at the current sales pace. A balanced market would be six to seven months of inventory.
Moreover, homes that are being listed are scooped up at an incredibly swift pace, with the typical days-on-market at less than 26 days in June. Multiple bidding is still prevalent on starter homes in many markets across the country. The demand is there. The supply is not.
Because of the housing shortage, home price growth continues to exceed wage growth. In June, the national median home price grew 5.2% to reach an all-time high of $276,900.
In the West, home prices soared by 10.3%; the West also experienced the biggest decline in home sales, by 5% from one year before. The pattern is clear: Low inventory leads to fast rising home prices, which then deters homebuyers.
What is the solution to get home sales, and consequently Americans, moving again? More new homes need to be built. Though home construction has been rising, the actual figures are not that impressive and are still well below historical averages.
Over the past decade, housing starts averaged 885,000 per year. For comparison, the long-term average of new home construction has been 1.6 million per year.
Another way to illustrate the housing shortfall is that over the past decade, only 8.85 million new homes were built compared to the normal 16 million, and hence, there is a cumulative shortage of 7.15 million homes. It could take the country four years to climb out of such a deep shortfall.
What can be done to speed up the supply? One thing that will not help is rising material costs, which hinder builders' ability to grow their businesses. The lumber tariff is a pure, unforced policy error that limits job creations associated with more home building.
Another item for consideration is the supply of labor. Not everyone should be college-bound and bear the cost of student debt; more emphasis should be placed on vocational training: carpentry, plumbing, electrical work and the like, for those who are not as academically inclined.
Perhaps a program in Tennessee that offers free vocational training to anyone who is laid off could be propagated to more states.
Other supply measures at local levels are also critical. Consider the repurposing of declining commercial buildings, such as turning empty shopping malls into residential condominium units, or making it easier to rehabilitate a property.
An overly stringent permitting process with high impact fees on homebuilders also holds back supply. Turn NIMBY ("Not In My Backyard") into YIMBY ("Yes in my backyard") by providing financial incentives, such as one year of property tax relief, to those neighbors affected by new developments.
With a robust increase in housing supply, home sales will start to move higher.
Lawrence Yun is the chief economist at the National Association of REALTORS®.