Everyone (buyers, sellers, industry experts, economists, real estate media, etc.) keeps singing the same sad tune about the state of the housing market over and over again…there is NOTHING TO BUY.
Typically, if there is such a thing as typical anymore, having a six-month supply of for-sale homes is considered to be a sign of a healthy housing market. Today’s housing market has, at best, a four-month supply of for-sale homes BUT within that four-month supply, the number of for-sale homes is -30%-40% lower than what is considered to be “normal.”
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What happened? During the beginning of the last decade, there was too much new construction supply plus millions of foreclosed homes flooded the market. Simultaneously, demand crashed and home values plummeted -35% nationally.
Builders responded as expected – they simply stopped building. And they continued not building – certainly not enough to meet demand or enough to replace homes lost to natural disasters or demolitions.
There is a ray of hope, however, and home building is beginning to look like it’s going in the right direction. November 2019 saw single-family permits rise +0.8% and multi-family permits increase by +4.4%, a 12.5 year high according to the Department of Commerce and the Department of Housing and Urban Affairs. And new construction starts rose +3.2% behind October 2019 starts that increased +3.8%. Places such as Austin (+7%) and Boise (+5%) that are generated new jobs, the new construction market is looking better if not good, according to a new report by the American Enterprise Institute using data from DataTree by First American.
Some builders are even building entry-level homes…selectively.
But, new construction accounts for only 10%-20% of all home sales. What has happened to existing home inventories?
There are several reasons for this critical inventory shortage among existing homes…
- Home tenure has more than doubled in the last 20 years. Home tenure has gone from 5 years to 12 years, according to
- Boomers are aging in place and not moving into assisted living communities until their mid-80’s.
- There has been an increased formation of multi-generational households.
- Young adults moved back into their parents’ homes.
- Many current homeowners believe “there is nothing available to buy.”
- Nearly 20% of homeowners have less than 20% equity in their current homes, not enough to enable them to move elsewhere.
So, what is the upshot to this inventory crisis? Just as there is no one “reason” for the current inventory situation, there is no one solution. However, the most likely scenario is that inventory will gradually return to “normal” as home prices will improve the financial outlook of equity-challenged owners, Boomers will eventually downsize, Millennial children will continue “moving out” of their parents’ homes and builders will slowly ramp up their home production.
According to Mortgage Bankers Association chief economist Mike Fratantoni, “The robust growth in home construction, highlighted in the November data is quite welcome…Strong monthly and annual gains indicate that potential homebuyers next year will have more properties to choose from.”
Lawrence Yun, chief economist with the National Association of REALTORS ® (NAR), is more cautiously optimistic. “The latest housing starts numbers are good and rising but still short by 135,000 compared to long-term averages and well short of the 5-6M that is needed to fully end the housing shortage.”
Thanks to HousingWire’s Alcynna Lloyd and Rick Shargo for source data.