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» VISIT US ONLINE @ DSNEWS.COM 25 trend has actually been going down since last April. It bounced around a little bit but trended downward. Overall, I think what's going on is a bit confusing. First of all, you have a very strong economy in terms of jobs and job growth. In- comes and wages are now picking up a bit. But you're not seeing a lot of homes coming onto the market, so there's a shortage on the market. Demand is high and supply is low. Why do you think there is such a shortage as of late? And what does that shortage mean for affordability? at's because every year a number of homes deteriorate and you need to replace them. e population grows and households grow, so you need to expand for that. Construction—while it has been increasing the number of new homes every year since the recession—it still hasn't caught up to what it should be in order to make up for the homes that are lost to deterioration and the new homes needed by young people forming new households and population growth. So we have a shortage, and that's causing housing prices to go up pretty rapidly. We know that the interest rates are beginning to rise and that's also a sign of the economy doing well. As a result, the Fed is saying, "Okay we're over this recession and we have to make sure that we don't get into an inflationary period." With ris- ing interest rates and prices, affordability is go- ing down and there's a bit of a housing shortage. What effects will we see as a result of that dip in affordability? ere are lots of buyers out in the market. Demand is high because people have money in their pockets, the millennials are tired of living in the basement of their parents' houses, and their parents are tired of it, too. ere's strong demand, but when they get out there in the market, they're not seeing what they're looking for. It takes them longer to find what they want, and they have to compete against other people. Homes that are on the market are selling in a very short time. As prices go up and interest rates go up, affordability goes down. ey both impact monthly payments—the thing most people focus on when they're buying a house. If the payment is higher than their budgeted amount and they stick to their budget, it means a little bit less in terms of the number of rooms, the location, the quality of the schools, the closeness to work, and other important qualities they want in a home. Ultimately, that means they have to com- promise. If you were to arrange a community's houses from most expensive to least expensive, buyers would have to start going down to the bottom of the list—the more affordable homes. at means that there's increasing demand at the affordable end and a little less demand at the upper end. Meanwhile, builders are building more homes at the higher end. ere's this dis- connect; supply is increasing at the higher end, but demand is going towards the lower end. e last existing home sales report offered proof. On the more affordable homes, sales were actually plummeting. I think it's because there just aren't that many homes on the market and there are so many people out there snapping them up, that it's actually hard to find a house at the more affordable end. At the other end, you see that there's a surge in sales because there are plenty of homes to buy. It's a really interesting example of how the supply side can limit the actual purchases. We need to keep an eye on that. I'm not saying that overall sales are coming down just yet. I think that sales will continue to grow a bit this year. We need to be cautious, though. Everybody is concerned about inventory and we need to understand those dynamics. How worried should we be about affordability and inventory? We shouldn't panic. Obviously, if you're very low income and you can't find a house, you will be worried, but in terms of the general economy, affordability at this point is pretty good by historic standards. In other words, it's getting worse but it's not bad where it is. Why do I say it's not bad? Affordability looks at what household incomes are, the jobs that are there, and other factors that go into income. It looks at the interest rates, because obviously, for the same-priced house, if interest rates rise, your monthly payment is going to be higher. It uses all of these factors to calculate what is affordable. Yes, prices are higher than they were 20 years ago, but so are incomes. You have to look at the balance between the prices, the interest rates, and the incomes to see where affordability is. By historic standards, looking back over the last 30 to 40 years, we're probably somewhere in the middle. It's not too bad, but we're going in the wrong direction in terms of affordability for young families. While we're talking about young families, that's where a lot of the growth and demand is, amongst the millennials—these first-time homebuyers who had delayed gratifi- cation during the recession but now are ready to move in with their loved ones, get married, start families, and buy a home. What do you see happening in the rest of 2017? I think in terms of the sales in general, it's going to come in fits and starts because there are two ends of the market that are tugging in opposite directions. Demand is pulling up and there are lots of people out there wanting to buy, with money in their pockets. ey're ready to buy, but the supply is lacking. What's going to happen is that it'll probably slow the growth in sales. I don't think it's necessarily going to make them negative, but it's going to slow the growth in sales and it may happen in fits and starts. You might see one month it will bump up and the next month it will drop down. As we move forward, don't get too excited by the monthly figures. Compare it to the year before; that's always a good rule of thumb. Look at the trend over several months. Overall, I'm going to say we'll be just a bit shy of 3 percent growth in sales for the year. What other economic factors should we pay attention to this year? e other factors would be within construction itself— particularly new home construction. What's going to happen with labor supply? We are either at or very close to what economists call full employment. When we talk about full employment we mean the non-inflationary level of full employment. at means that there are going to be some labor shortages. at may cause builders to say, "Oh wow yes. We've got to get on the ball and build these houses because there's very low inventory," but they may have a difficult time ramping up. Another factor could be some regulations and fees that may be causing builders to not build as fast as they might have previously. Don't get me wrong about regulations. I think we need a certain number of regulations to pro- tect the consumer and the environment, but it may be time to review a couple of them that may be a bit ridiculous, in the way, and not really all that useful. en we have to look at what's going on with finance. Finance would be on two dif- ferent fronts. Finance going to the consum- ers—that would be the mortgage market. Will banks reassess the way they document income, allowing households with sufficient, yet untra- ditional sources of income to qualify? Finance going to the builders—that would be more the capital market. I would focus there on what is going on with small builders. One of the things that happened during the recession, and then following the recession, was that smaller build- ers have dropped out a bit. e larger producers are taking over but not fulfilling the market. at may be contributing to why we're not seeing the construction in new homes that we're hoping for. In addition to construction, look toward demographics. Boomers are retiring and will be looking to downsize or move to retirement homes. at may increase the supply of existing homes on the market, but over the next 5 to 10 years, not the next month.

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