Are housing prices about to rise in the USA?

Summary: The recovery of the American economy is generating great housing demand which eventually might lead to an increase on housing prices due to a very slow building rhythm. 

In a new analysis the National Association of Realtors measured whether new home construction has kept up with job creation to determine the impact of construction on housing supply.

The analysis shows that the labour market, which is a key to overall economic health, has recovered all of the eight million jobs lost since the recession and that new home construction is underperforming in 32 states and the District of Columbia.

Lawrence Yun, NAR chief economist, says there’s a strong relationship between new jobs and an increase in demand for housing. ‘Historically, there’s one new home construction for every one and a half new jobs.

He added that their analysis found that a majority of states are constructing too few homes in relation to local job market conditions and that the disparity was the greatest in Florida, Utah, California, Montana and Indiana, where job creation has been particularly strong.

‘A persistent lag in new home construction will lead to faster home price growth, which will negatively impact housing affordability,’ said Yun.

Additionally, real estate agents home price growth expectations in the first quarter of 2014 was generally strongest in states facing housing shortage conditions. Lack of inventory has pushed prices up and put pressure on affordability, especially for first time buyers.

‘Agents have an intuitive sense of how fast prices are likely to rise from on the field observations. Their price outlook largely shows gains to be the strongest in states with slow home construction in relation to job growth,’ Yun pointed out.

Looking ahead, Yun said that home builders will have to produce amidst the current challenges facing the building market. Limited access to credit for smaller builders, rising construction costs, concerns about the re-emergence of entry level consumers to the market in the face of student debt and a tight credit box, and general decline in affordability and purchase power over the last year.

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