Housing Shortage

News in both the economy and the real estate market has been guardedly optimistic for the last few months. Interest rates, after hitting record lows, began to rebound again. Home prices have been rising by double digits percentage points since winter, and the Case-Schiller index is up 11 percent year-over-year in March.

Add to this the fact that the statistics for closed deals and pending sales on homes is at a five-year high and the homebuyer traffic activity (monitored by the National Association of Realtors) is at record-breaking levels and you’d think you’d have extremely robust sales with lots of people getting the homes of their dreams, right?

Well, that’s only partly right. While it’s certainly true that people are buying houses (the five year high in sales is ample evidence of that), there are problems looming under the surface.

Pre-recession, about a million homes entered the market every year. Since the recession hit, however, the homebuilding industry has been severely depressed. At first this was balanced by the oversupply created during the peak years of the boom, but now, some experts estimate that the market is now undersupplied by 900,000 homes, and inventory (the number of homes available to buy) is at a thirteen year low.

Now that the economy is rebounding, and consumers are more confident, people are starting to enter the housing market again, only to find that the pickings are slim. The homes that are on the market are finally seeing multiple bids, and more and more would-be buyers are forced to put in bids with an escalation clause included.

The buying is still throttled by strict lending practices, including more stringent credit requirements and near-universal 20 percent down payments, which keeps first-time homebuyers out of the market.

Experts predict that if the economy holds strong, builders will increase output to meet demand, but in the short term this is good news for sellers, whose positions have finally strengthened. However, it is not clear whether sellers will be able to find an economical new home with the windfall, and some may not want to take the chance.

New construction will come slowly, as builders struggle with the rising cost of building materials and may be reluctant to return to full throttle with the memory of the recession so fresh. But it’s clear that with inventory at these levels, and the demand rising as the population not only grows, but strengthens, as the economy recovers, it might be that the real estate market has turned the corner.