Low supply, high demand — unpacking housing sector’s signals

Housing starts were down in April by 2.6 percent, following a 6.6-percent decline in March. This is the lowest level since last November. Yet, existing home sales boomed in March, increasing by 4.4 percent, much higher than the 2.5 percent expected, according to Reuters. It is also the highest level since 2007. Lower supply of housing with higher demand: What can this mean for the consumer and our economy? Should we be alarmed?

Let’s delve deeper into the facts. If we look at the demand side, it is clear Americans were confident enough to purchase new homes. March’s big increase was in response to February’s depressed sales from limited supply. This, accompanied by rising home prices and an unemployment rate about as low as it can go, shows that consumers were feeling confident that they can afford and were willing to commit to that new home.   

{mosads}If we look at the supply side, two consecutive monthly declines in housing starts can either mean that builders expect less demand going forward or, that they simply are at capacity and cannot find enough workers to build more homes. How can we know which is the case? While we cannot know for sure, this month’s home sales figures will give us a clue. If home sales and prices remain buoyant, we continue to chug along to the following month until we reach a turning point. 

The more important question is, how might this home purchasing situation play out? We know from our research that Americans have the tendency to rush into homeownership and become homeowners five years earlier in metropolitan areas with the highest-quartile house price growth compared to areas with the lowest-quartile house price growth.

There are clearly the elements of FOMO (fear of missing out) and overconfidence in today’s consumers, which means some degree of over-commitment. 

We also know that median home prices have grown faster than wages; home prices grew 6.8 percent compared to March last year, while wages grew 5.53 percent over the same period. In fact, except in the Northeast, median home prices grew faster than wages, with prices in the South growing at 8.6 percent, the highest rate in our country.

Given the Federal Reserve Board’s intentions to normalize monetary policy, interest rates can only go up, which means that homeowners’ burden will increase and they must expect to pay more for their mortgages in the foreseeable future.

While we see where this is potentially leading, it is not inevitable. On the consumer end, prudence is required. It means doing the math, taking a good hard look at how prices and interest rates might pan out and shopping hard for the right mortgage. It also means thinking hard about balancing home ownership and saving for retirement, given how the future of work is changing.

For our economy, the task at hand is to seize the moment and build upon our current momentum without wasting time. It means doing the math, taking a good hard look at where in our economy to find the growth we need and how we can capture it. If we are at capacity with 2-percent growth, how do we grow that capacity?

It also means a need for a laser-like focus on execution to deliver on the infrastructure and tax plans promised and more, without unproductive distractions. The ball is in the administration’s court.

Sumit Agarwal is William G. Droms Term Professor of Finance at Georgetown University’s McDonough School of Business, and a visiting professor in the Department of Finance, National University of Singapore. Cheryl Lim is a Ph.D. candidate in finance at the EDHEC Business School.

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