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ยป VISIT US ONLINE @ DSNEWS.COM 23 e U.S. economy currently is doing fine and creating jobs faster than most developed countries. Economic growth is around nor- mal trend levels, with a 2 to 3 percent GDP growth rate projected for the next two years. e labor market is robust, with more than 2 million jobs added each year. Moreover, the very limited housing supply will continue to provide a tailwind for home prices. Homes listed for sale are a third fewer than normal. What are some of the biggest challenges facing the housing industry right now from an economic standpoint? Nationwide, home building activity lags. Although housing starts have been on upward trend since 2011 and reached a seasonally adjusted annual rate (SAAR) of 821,000 in March, they are still 20 to 30 percent lower than the historical average. ey're also substantially below what is actually needed for housing, based on population growth, demand for second homes, and the need to replace obsolete housing. As a result, new home inventory remains limited. e months of new home supply declined in March to 5.2 months. Moreover, there are few new starter homes. Shrinking a bit from its peak reached in 2015, the average floor area of new single-home starts was 2661 square feet in Q 4 2016. at's 13 percent larger than for those homes built between 1999 and 2006. Large homes pose difficulties for buyers looking to "trade up" and are unaffordable for most first-time homebuyers. Sluggish income growth has been a concern for the housing market. For the past four years, the year-over-year growth rate of personal per-capita income has been lower than that of the FHFA's House Price Index. Weak income growth cannot support strong house price appreciation for a long period. Moreover, income growth among dif- ferent tiers is unbalanced. Households with lower incomes have experienced less growth than those with higher incomes. On the other hand, house prices by tiers show that lower-tier house prices increase faster than higher-end house prices in most MSAs. e combination of imbalanced income growth and imbalanced house price growth makes it extremely difficult for first-time buyers to enter the market. Finally, rising mortgage rates could hurt home sales by raising monthly payments for the majority of future buyers who finance their purchases. If interest rates rise too quickly, then home sales will be negatively affected, and price growth will temporarily slow down. What are your predictions for the summer buying season based on what you're seeing? Hot markets will remain hot, with continued bidding wars for desirable properties. Home sales overall are strong, up slightly from last year even though there are fewer homes to choose from. Existing home sales in April were at a 5.6 million annual rate, near a decade high. Strong demand and limited supply resulted in median home prices rising 6 percent over the past year. Meanwhile, new home sales have moved around the 600,000 a year level all year, still far below what is needed to keep prices in check. Even a modest increase in mortgage rates will not derail this strong a market. Where are the riskiest places to buy and sell a home right now? The best? A good forward-looking indicator for housing markets is the Months' Supply of Homes for Sale, which is the number of homes currently listed for sale divided by the number of homes sold last month. Nationwide, homes listed for sale are a third fewer than normal, tilting the bargain- ing power in favor of sellers. Tight supply is particularly common along the West Coast and in many mountain states. On the flip side, some areas in Florida, Connecticut, and Illinois are now buyers' markets due to excessive listings relative to the number of buyers. For example, Miami is working off a backlog of new condos on the market and, until supply and demand are more balanced, we expect home price growth there to slow from its unsustainable 8.1 percent year-over- year growth rate. Are there any red flags we should be worried about in the year to come? e Arch MI Risk Index finds a very low risk of home price declines, even in the riskier energy-producing regions. North Dakota continues to have the highest likelihood of seeing house price declines (38 percent), followed by Wyoming (37 percent), and Alaska (31 percent). Of the largest 100 metros, the highest risk scores indicate only about a one in five chance of lower prices in two years, led by Oklahoma City, Oklahoma, (21 percent); Houston-e Woodlands-Sugar Land, Texas (19 percent); Tulsa, Oklahoma (19 percent); Miami- Miami Beach-Kendall, Florida (17 percent); and New Orleans-Metairie, Louisiana (16 percent). is is mainly due to lingering weakness in employment and home sales as a result of the energy boom unwinding two years ago or from high inventories of homes for sale. There's a lot of uncertainty surrounding housing policy in recent months. What impact is that having on the market in your opinion? I would say very minimal impact on either homebuyers or secondary markets so far. e current tax proposals appear to preserve the tax deductibility of mortgage interest payments, but if that changes it could hurt the higher end of the market. Changes to the GSEs could also result in higher mortgage rates if not handled correctly. If reformed carefully, the new housing finance system could help stabilize the housing market, provide affordable housing credit, and promote increased private investment without putting taxpayer's money at risk. e path to this destination, however, could have a big impact on the housing market. It is possible that both the primary and the secondary markets will experience larger volatility during the transition to the new scheme. If uncertainty regarding housing policy increases, lenders may become overly cautious and investors may be less confident in mortgage-related securities. Also, a large increase in economic uncertainty for any reason would have a negative impact on housing demand. Policymakers should keep all this in mind when planning changes. Under President Trump, it seems we are going to have a lot of regulatory changes or, more specifically, deregulation. Is that a good or bad thing? Loosening of current lending standards will be a positive since they are too restrictive now. Too heavy or too light regulation both lead to poor economic outcomes. Capitalism needs clear, enforced, and fair rules to function. Adam Smith wrote about how proper government oversight is needed to prevent businesses from circumventing free markets. Oddly enough, we have both too much and too little regulation. Some of that is because of overly complex, outdated, or economically illogical rules, some of which were written by lobbyists in order to favor specific companies. So some intelligent deregulation would be good, but there is also a large risk that the administration and/or Congress will overshoot.