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September 1, 2014

Most States Face Long-Term Affordability Crisis

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Most States Face Long-Term Affordability Crisis

Thirty-two states and the District of Columbia are at risk of long-term home affordability problems and housing shortages if lackluster levels of new-home construction don't catch up to the strong pace of job growth, according to new research by the National Association of REALTORS®.

Over a three-year period ending in the first quarter of 2014, NAR found that the rate of new single-family housing starts was far below historic averages relative to job growth in the majority of the country. Historically, there's one new home construction for every one-and-a-half new jobs, but 32 states and the District of Columbia had a ratio higher than the long-term average of 1.5. The discrepancy was highest in California — where the ratio of jobs to housing starts was greater than 5 — followed by Florida, Utah, Montana, and Indiana, all of which had a ratio of 3 or greater. Job growth has been particularly strong in those five states.

"Not all new jobs result in a new household and an increase in demand for housing, but that relationship is strong, and the implication is that the lack of construction has hamstrung supply — and thus home sales," NAR notes.

NAR chief economist Lawrence Yun warns that more and more buyers are going to be priced out of the market if builders don't step up construction to relieve inventory and slow drastic price increases.

"REALTORS® have an intuitive sense of how fast prices are likely to rise from on-the-field observations," Yun says. "Their price outlook largely shows gains to be the strongest in states with slow home construction in relation to job growth. ... It's critical to increase housing starts in these states facing shortage conditions or else prospective buyers may struggle with options and affordability if income growth cannot compensate for rising home prices."

Though inventory of existing-homes for sale increased for the first time this year in April, it still remained historically low, averaging six months or less for 20 consecutive months, NAR notes.

Source: "Sluggish Construction Portends Steady Price Growth," NAR's Economists' Outlook blog (June 8, 2014)

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