How High Will the Cost of Housing Go?

© Provided by CNBC
© Provided by CNBC

The housing recovery is coming at a steep price—for both homebuyers and renters. The reasons can be found in the unique supply and demand circumstances that were left in the wake of the worst housing crash in history. 

For several years, would-be buyers stayed on the sidelines, unwilling or unable to buy a home. That pushed rents higher. Homeowners, who might have wanted to move up, also stayed put, either underwater on their mortgages or afraid to sink more money into a new home. And builders never returned even close to the pace of historical norms.

Now demand is finally surging again, thanks to higher rents and a slowly improving economy, but supplies of homes for sale are anemic. There were just 2 million existing homes for sale at the end of March, a 4.6 month supply at the current sales pace. A six-month supply is considered healthy. The lack of homes for sale pushed the median price of a single-family home sold in March up 8.7 percent, more than twice the gains housing was seeing a year ago.

“We are not seeing the inventory gains we had expected,” said Lawrence Yun, chief economist of the National Association of Realtors. “It’s not healthy.”

Sales of existing homes did jump to the highest level in 18 months in March, but first-time buyers were still barely a third of the market. They should be more like 40 percent of it. Realtors say that if sales stay at this pace, 2015 will end up being the strongest year for housing in nine years, but that’s a big “if” since in order for sales to happen there needs to be more homes for sale.

“For sales to build upon their current pace, homeowners will increasingly need to be confident in their ability to sell their home while having enough time and choices to upgrade or downsize. More listings and new home construction are still needed to tame price growth and provide more opportunity for first-time buyers to enter the market,” added Yun.

While sales are improving, they are nowhere near where they should be given demographics and market demand. Household formation is still all on the rental side, and homeownership is sitting at a 20-year low and expected to fall further. That is why rents continue to rise, up 3.7 percent from a year ago, according to a monthly rent index from Zillow.

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Source: CNBC | Diana Olick

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