Housing: Positive outlook for 2018.

• Author: Mccoy, Douglas M.

Demand for single-family housing will remain strong in 2018, mirroring 2017.

Positive job gains and attractive interest rates continue to bring buyers to the market. Consumer confidence remains high as employment growth remains positive, interest rates continue to be attractive, and consumers continue to improve their balance sheets. On the other hand, supply is struggling to keep up with demand, while builders struggle to produce enough homes to meet market demand. Moreover, where demand is strongest--for starter and lower-price homes--supply is weak and pricing pressure strong. It is difficult for builders to produce these homes because building costs prohibit it.

Coupling these realities with a good job market and continued low interest rates is resulting in pricing growth that outpaces inflation. In particular submarkets, with very strong demand characteristics and constrained supply, it is possible that unsustainable pricing exists. In summary, the 2018 housing market will experience strong demand, but buyers will be challenged by rising prices--especially if they are looking for starter or lower-priced homes.

For example, the National Association of Realtors forecasts that existing home sales will increase 6.9 percent from 2017 levels, while new single-family home sales will increase 17.1 percent nationally. In 2016, we saw existing home sales increase 3.8 percent, while 2017 experienced a 0.2 percent decrease (see Table 1). In contrast, new single-family homes saw increases of 12 percent and 6.6 percent, respectively, for 2016 and 2017.

Housing starts are projected to increase 10.3 percent in 2018, with single-family units increasing 15.5 percent and multifamily units decreasing 2.3 percent. Median home prices for both existing and new homes are expected to increase 4.6 percent and 3.7 percent, respectively. The S&P CoreLogic Case-Shiller National Home Price Index (not seasonally adjusted) reported a 5.9 percent annual gain in home prices in July. Consumer prices are expected to increase 2.5 percent in 2018, up from 2.0 percent in 2017.

Considering the above statistics, one can see the strong demand and the resulting increase in pricing outpacing inflation. Also, one can reason the need for supply to catch up with demand to provide a more reasonable pace of home price increases. What one cannot know is the impact of these dynamics on particular submarkets that have very strong demand drivers, primarily positive job growth, and weak...