Will Low Home Inventory Dampen The U.S. Housing Boom?

The housing market is booming with buyers excited to purchase a home. The low mortgage rates are fueling buyer’s interest in the market for a home. The only downfall is the low home inventory.

There are several factors that are occurring that have hindered the production of new home inventory. There are low mortgage rates but the ongoing shortage and higher prices of homes are not helping the housing market.

Today’s focus has shifted for home builders. A decade ago builders were focusing more on higher-end homes. Builders did not build as many homes because they could earn just as much on one expensive high-end home than several less expensive homes combined. The huge millennial generation is now in the market for a home and the focus has shifted to less expensive properties.

Existing homes are also on the decline. The supply has been shrinking for years and is now lower than ever.  At August’s sales pace, it would take a little more than three months to run out of new homes for sale, the lowest level on record, according to government data dating back to 1963.

According to the National Association of Home Builders, new home construction will be about the same this year coming in at just under 900,000. Predictions for 2021 say home starts will rise but only slightly because of the cost and availability of materials.

Lumber prices have spiked causing an added expense of $16,000 to the cost of a typical house according to the National Association of Home Builders. With the stay-at-home orders from COVID-19 sawmills were closed in the U.S. and Canada causing major timber shortages. Joshua Zaret, an analyst at Bloomberg Intelligence also says wildfires and the beetle infestation have also caused a delay in lumber production.

Rising home prices are also a burden to the market. Builders keep raising the prices of the homes because of the rising costs of materials. It is reported that in some areas of the country, builders are raising home prices as much as 2% a month.

“If that went on for two or three years, we’d be very concerned about affordability,” John Burns, an Irvine-based real estate consultant said. “Every time prices go up, it’s great for homeowners and bad for the renter who aspires to be a homeowner.”

Expensive materials and an increase in demand do not go well together.  The looming issue is that the demand for housing is outstripping supply at a time when construction has gotten more expensive.

Many home builders such as Lennar Corp. are only selling current inventory and what is currently under construction. Pre-sales are on hold so that the builder can try and avoid today’s high material prices.

“Sales could have been stronger with a singular focus on volume,” Stuart Miller, the company’s chairman, said on a Sept. 15 earnings call. “It is challenging at best to materially ramp production in this labor-constrained market, and it’s even more challenging to replace entitled land.”

The low inventory will only keep occurring with such high material prices. Builders want to keep building and producing inventory, however with the high cost and long waiting time on lumber that is just not possible at this time.

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