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July 2015

Economists say many factors contribute to housing shortage

Blame equity-impaired homeowners for the housing shortage. Builders and their below-average output can also be faulted, according to economists who spoke at a conference of real estate journalists.

Insufficient inventory across much of the country equals fewer sales, the experts agreed as they debated various inhibitors to housing activity.

Lawrence Yun, chief economist for the National Association of REALTORS® and one of the panelists, believes the inventory shortage is due to a lack of new construction. He and some of his counterparts suggest builders disproportionately favor constructing high-priced housing to bolster profit margins. Builders dispute that, saying there isn't sufficient demand at the entry level to justify large-scale production of lower-priced homes.

Despite an uptick in the pace of home construction, figures for May show it is at only 75 percent of the annual average from 2000 to 2014.

Economists from CoreLogic and Zillow Inc. said a persistent lack of equity is also crimping activity. "One in three homeowners either has negative equity or very little equity in their homes," stated Stan Humphries of Zillow. His research shows one-third of U.S. homes were equity impaired (with 20 percent equity or less) in the first quarter of 2015. An estimated 5 million U.S. homes are worth less than the debt owed on them.

Although owners with small equity can sell their homes, they may be challenged to cover costs such as commissions, closing costs and a down payment for their next home. Other owners are reluctant to sell because they took advantage of recent low rates to refinance and don't want to forfeit those terms.

Aiming to defend his constituents, the chief economist for the National Association of Home Builders said reluctant sellers of existing homes rather than new homes are causing the housing shortage. David Crowe, the NAHB economist, contends would-be sellers are hamstrung in part by a fear they won't be able to find another home if they sell their current one in the midst of current inventory shortages.

Another factor the economists cited was the conversion of single-family homes to rentals. Since the downturn, investors have purchased 3 million single-family homes and turned them into rentals, according to Frank Nothaft from CoreLogic.

Economists also listed strict mortgage-qualification standards, prohibitive land costs, and restrictive lending to small builders as other culprits for the housing shortage.

The economists spoke at the 49th annual conference of the National Association of Real Estate Editors. Its 650 members cover all aspects of residential and commercial real estate.