According to Goldman Sachs, the US housing sector is on fire. New home sales and housing starts both reached their highest levels since 2006 in March, and red-hot demand has brought the supply of homes available for sale down to the lowest level since the 1970s. Competition among buyers for a dwindling national housing supply has sent prices 12% higher over the last year, but so far this has done little to reduce the severe imbalance between supply and demand in the housing market.
Strong demand for housing looks sustainable. Even before the pandemic, demographic tailwinds and historically-low mortgage rates had pushed demand to high levels. A shift in preferences during the pandemic caused demand to spike, and consumer surveys indicate that household buying intentions are now the highest in 20 years. This is especially impressive because unlike in the mid-2000s, mortgage lending standards have remained fairly tight. With demographic trends still strong, mortgage rates very low, housing affordability still high, and household wealth as a share of income at the highest level in US history, demand should remain strong.
The supply picture offers no quick fixes to the shortage of available homes. Homebuilders are again facing headwinds that were already present before the pandemic, especially a lack of available plots to build on and a lack of construction workers. These constraints are likely to limit the pace of annual homebuilding to around 1.5mn in coming years. The expiration of pandemic-related forbearance provisions later this year should put some additional homes on the market, but this will only modestly alleviate the lack of supply.
The resulting picture is one of a persistent supply-demand imbalance in the years ahead. To forecast what this means for home prices, we estimate a model that jointly considers supply, demand, affordability, and home prices. The model suggests that rising prices will only gradually reduce affordability enough to dampen demand and mitigate the supply-demand imbalance. As a result, the model projects double-digit price gains both this year and next.
House price growth does not directly enter the inflation statistics, but it does spill over to rent inflation, as economic intuition would suggest. This is one reason we expect an acceleration in the shelter category this year and next to provide a meaningful boost to core inflation.