By Ruth Mantell –
WASHINGTON — Sentiment, not to mention stock prices, of home builders are perking up, and they have good reason.
The inventory of existing homes is at a 10-year low, according to data released Monday by the National Association of Realtors. At the current sales rate, inventories represent a 5.4-month supply, the leanest supply since 2006.
“Builders are reporting increasing demand for new homes as inventories of foreclosed and distressed properties begin to shrink in markets across the country,” said Barry Rutenberg, a Gainesville, Fla.-based home builder and chairman of the National Association of Home Builders.
Building sentiment rose to a six-year high in November, while an exchange-traded fund of builders has roughly doubled from a year ago.
Meanwhile, the rental vacancy rate, which measures the proportion of the rental inventory that is vacant for rent, fell to 8.6 percent in the third quarter from more than 11 percent three years earlier, around the end of the Great Recession. In fact, recent rates are the lowest since 2002. Homeowner vacancy rates are also down from recession peaks.
“With job creation and historically favorable affordability conditions, people are buying homes and renting apartments,” said Walter Molony, a spokesman for the Realtors’ group. “Rising rents are encouraging long-time renters to buy a home as a hedge against inflation, so we have the unusual situation of seeing both rental and buying demand rising at the same time.”
Low inventories have price implications.
“The low inventories are also driving up home prices and will probably continue to drive prices up next year,” said Patrick Newport, U.S. economist at IHS Global Insight.
But official data likely understate supply, given shadow inventory from foreclosures and wary owners.
“Nonetheless, the improvement in virtually every home price measure combined with rising home-builder confidence suggests housing inventories have tightened,” said Conrad DeQuadros, an analyst at RDQ Economics in New York.
And the housing market will face greater demand as the pace of household formation picks up after taking a hit in the recession.
“Our population has been growing. … Household formation is now coming back and is fairly close to normal,” Molony said. “A large pent-up demand had been building.”
There’s a substantial gap to make up: Only about 500,000 households were formed on average in each of the three years after the start of the Great Recession, down from an annual average of about 1.5 million between 1997 and 2007, according to Timothy Dunne, an economist at the Federal Reserve Bank of Cleveland.
Going forward, gains in household formation depend on the strength of the labor market’s recovery, as well as the larger economy, Dunne said.
“While such increases in household formation will certainly aid the housing market, it is an open question how increased formation will affect the relative demands for rental or single-family owner-occupied housing,” Dunne wrote.
Still, factors such as tight lending terms will “prevent the sort of powerful housing recovery that has typically occurred in the past,” Federal Reserve Chairman Ben Bernanke said Tuesday in a speech at the New York Economic Club.
“Unfortunately, while some tightening of the terms of mortgage credit was certainly an appropriate response to the earlier excesses, the pendulum appears to have swung too far, restraining the pace of recovery in the housing sector,” Bernanke said.
