Household Formation, Loosening Lending Criteria Stimulate Housing Demand


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Research Brief
July 2017
Developing Trends
Existing single-family home prices increased 5.8 percent year over year in May to $252,800 and are up nearly $20,000 since the end of 2016. The increase pushed the median to a record high, largely driven by strong buyer competition and limited inventory across the country.
First-time homebuyers accounted for 33 percent of sales in May, up from 30 percent one year ago. Loosening lending criteria is making it easier for first-time borrowers to secure financing, and a healthy pace of job creation is releasing pent-up housing demand.
Following two quarters of sluggish absorption, demand for apartments regained strength in the second quarter of this year. At the end of June, apartment vacancy reached 3.8 percent, falling 60 basis points from the first quarter and remaining flat year over year.
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Household Formation, Loosening Lending Criteria Stimulate Housing Demand
The current pace of existing single-family home sales is at the highest level since the Great Recession. For-sale inventory appears to be the only hindrance to pushing sales activity closer to previous levels. In May, existing supply slipped to 4.2 months at the current sales pace and the number of days nondistressed homes remained on the market dropped to 27 days, its lowest on record. As household formation strengthens and for-sale inventory remains limited, a large share of housing demand is filtering into apartments. In the second quarter, apartment developers completed more than 86,400 units, a 30-year record, but absorption also reached a new peak as over 175,600 rentals were filled. Steady job gains will continue to release pent-up housing demand through the remainder of the year, and hurdles to homeownership will keep many would-be owners in rentals. Later this month, Fannie Mae will raise the debt-to-income (DTI) ratio from 45 percent to 50 percent, easing lending criteria to attract first-time homebuyers and millennials riddled with student loan debt. Whether the change makes a difference in the homeownership rate is unknown, as several lenders have been underwriting higher DTIs as long as borrowers could reasonably show they would not default on loans. Slower demand for mortgages has prompted the change, but downpayment obligations will likely remain a hurdle as many millennials are making large student loan payments, restricting the ability to save. Higher home prices and fierce competition for existing single-family homes, as well as a lack of entry-level home construction, will also continue to weigh on the transfer of households into homeownership and strengthen demand for apartments.
$252,800 Median price of existing single-family home in April 2017 4.2 Months of supply at current sales pace in May 2017
* Forecast
Trailing 24-month average for household growth
Sources: Marcus & Millichap Research Services; U.S. Census Bureau; MPF Research; National Association of Realtors; National Association of Home Builders
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