‘Persistent’ Lack of Inventory Driving Affordability Lower

Supply and demand imbalance in housing means continued upward pressure on house prices and falling affordability, said First American Financial Corp., Santa Ana, Calif.

The company’s Potential Home Sales model for June reported potential existing home sales increased to a 5.59 million seasonally adjusted, annualized rate, an 0.8 percent month-over-month increase. This represents an 85.8 percent increase from the market potential low point reached in December 2008. However, the report said the market potential for existing home sales fell by 3.8 percent compared to a year ago, a decline of 220,000 sales. Currently, potential existing-home sales is 780,000, or 14.0 percent below the pre-recession peak of market potential, which occurred in July 2005.

The report said the market for existing home sales is outperforming its potential by 0.6 percent, or an estimated 31,000 sales. Meanwhile, market potential grew by an estimated 45,000 sales between May and June.

“Demand for homes continued to remain strong this month, largely due to continued demand from more Millennials deciding they want to be homeowners. Yet, the supply of homes for sale continues to decrease,” said First America Chief Economist Mark Fleming. “Existing homeowners fear not being able to find something affordable to buy, and a lack of residential construction workers is increasing the cost of building and slowing the pace of new construction. The result is a supply and demand imbalance that produces upward pressure on house prices and decreasing affordability.”

Fleming noted continued declines in residential construction employment is dragging down housing starts, a critical source of housing supply. “It’s very hard to increase housing starts without increasing residential construction employment,” he said.