The US housing market is supply constrained, sending home prices in major US metros back to levels last seen in the winter of 2007.
Research out of JP Morgan published Thursday indicates that this situation appears unlikely to resolve itself anytime soon.
“Nationwide house price indexes have been pushing steadily higher—real house prices are now 25% above their 2012 trough and at the highest levels on record outside the pre-crisis boom years,” JP Morgan’s Jesse Edgerton writes.
“One might wonder if these high prices reflect growing demand that could soon elicit a wave of construction that would prove our forecasts wrong. We find, however, that high prices are concentrated in markets where supply is constrained by geography or regulation, suggesting there may be little room for additional construction.” (Emphasis added.)
In short, areas seeing home prices rise fastest — think San Francisco, San Jose, and Denver — are not in a position to meet the demand for housing implied by the rise in prices.
The problem here is two-fold.
As the chart below shows, high home prices haven’t influenced the aggressiveness with which homebuilders have added to the housing stock over time. This indicates the supply side of the market is content to accept elevated prices even if the volume of homes built and sold is below what the demand side alone might dictate.
Additionally, Edgerton’s work shows that markets equipped with both high home prices and an ability to meet the demand implied by these prices literally do not exist.
“Metro areas in the upper right quadrant of the chart would be the best candidates for a demand-driven construction boom,” Edgerton writes. “Unfortunately, sharp-eyed readers will note that there are no dots in the upper-right portion of the figure.”
Edgerton adds, “Thus, it is unclear how much we can expect high prices to drive construction in the coming years, as the data show that high prices are concentrated in areas where supply may be limited in its ability to respond to demand.”
Data out this week from S&P/Case-Shiller showed home prices rose 5.3% nationally in August, up from a 5% annual gain seen the prior month.
A report from the National Association of Realtors last week showed a 5.6% increase in median existing home prices, the 55th straight month of year-on-year gains. At the current pace of existing home sales, there exists just 4.5-months’ supply in the US market.
“Inventory has been extremely tight all year and is unlikely to improve now that the seasonal decline in listings is about to kick in,” chief economist for the National Association of Realtors Lawrence Yun said in a report.