Housing shortage poses concern for real estate economist
The quickening pace of the housing recovery has surprised homebuyers and housing pundits alike, as year-over-year home prices have increased more than 20 percent in a few markets. Now there are concerns that rising mortgage rates, which closed in on 4.5 percent last week, will quash demand.
Lawrence Yun, chief economist of the National Association of Realtors, was in the Chicago area recently and shared his thoughts with the Chicago Tribune. This is an edited transcript of the conversation.
QUESTION: The S&P/Case-Shiller home price index and consumer confidence both showed strong gains last week. Where do you draw the line between being excited and being concerned?
ANSWER: I don't have any concerns about the sustainability of the real estate recovery. In terms of hitting the bottom, recovering, this is genuine. It has a foundational support to it.
Now we are getting employment growth, and people who are buying are buying with larger cash shares.
Buyers are much more creditworthy than before, and given that prices are recovering now, the default rate diminishes.
Q: Do you have any worries about the formation of another housing bubble?
A: I am concerned about the rise in prices in some markets being too fast, surpassing people's income growth by many multiples. It is not sustainable. You cannot have a situation where prices rise 10 or 15 percent, incomes rise 1 or 2 percent, year in and year out.
I'm concerned about this mismatch, and furthermore, the mismatch of many younger people being unable to buy a home. It's very low. It's only 28 percent of the recent buyers. That's implying that younger people are not participating in this housing market recovery.
Q: Buyers feel a sense of urgency to act before home prices and mortgage interest rates climb higher. Should they rush?
A: A home is the most expensive expenditure for most families. They should feel completely comfortable in their decision, and a rush decision does not sound comfortable.
Mortgage rates are probably going to be rising, maybe there are a couple of months where it dips downward before going up again, but the most likely direction is upward. They should use this information as part of their decision-making process, but the consumer should not feel the need to make this decision quickly, because any time that happens, there's always buyer's remorse and regret.
The inventory selection may be better one year from now, so one may be paying slightly higher mortgage rates, but they have a better home.
Q: What about credit availability?
A: Credit availability has been excessively stringent. It'll be at least two to three years before we get back to normal standards.
Q: What worries you most about the market right now?
A: What worries me is the lack of inventory, and the potential persistence of that lack of inventory. If we have a lack of inventory continuing and we will see this price growth continue, it makes it less affordable, and homeownership opportunities diminish for more people.
The choke point is housing starts. If we can increase inventory through increased housing starts, then prices will moderate, and that provides more opportunity for more people to become homeowners.
The only genuine inventory increase is either for the homebuilders to build more or for the investors to reverse their purchases. In other words, they bought; now it's time to sell. But there are no investors doing that.
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