Tight Supply Driving Home Prices Up but Don’t Expect Another Boom

 

The low housing inventory continues to drive developments in the market, which will ultimately lead to more house price appreciation, according to the Q4 Housing Market Analyst released by Capital Economics on Thursday.

The tight housing supply amid recovering demand has constrained sales and put upward pressure on housing prices. But don’t expect another house price boom, the report said.

“With the months’ supply of homes having been under five since May of this year, it is not surprising that house price growth is picking up,” Capital stated in the report. “But there are a sizeable number of vacant homes being held off the market. As these are gradually listed for sale or rent, that will ease supply conditions to some extent. And with banks not set to repeat the rapid credit loosening of the mid-2000s, another house price boom will be avoided.”

The lack of inventory is holding back existing home sales, and Capital Economics said it does not expect those conditions to improve in the next couple of years. But slow existing home sales will mean good news for new home sales, since builders are able to complete their homes and sell them more quickly—and as a result, they are increasing production of new homes. In November, housing starts for single-family homes increased to their highest level in seven years, and as a result of the increase in production, new home sales are expected to increase substantially.

The expected Fed rate hike occurred on Wednesday up to a range of 1/4 to 1/2 amid a positive jobs report that showed an average monthly job gain of about 218,000 for the three-month period from September to November. Despite the Fed raising the federal funds target rate, housing affordability is expected to remain favorable for some time, according to Capital.

“For one, mortgage interest rates will stay sub-5 percent until at least early-to-mid 2017,” the report stated. “Moreover, earnings growth is also finally set to rise. So although mortgage payments as a share of income will go up, they will remain under the historically normal level of 20 percent over the forecast horizon. An increase in earnings will also ensure that homes do not become overvalued.”

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