There Is No Shortage Of New Homes

For all the yelling and complaining about real estate’s inventory shortage, it turns that a lack of stuff to buy is an existing home problem. The story is different with new homes. There was six-month’s of inventory on hand at the end of 2021. Real estate investors and buyers in general are not chasing new construction with any particular zeal.

More inventory is supposed to be a sure path to lower home prices and more sales. One way to get that additional inventory is to build more new homes, but despite massive demand new home production is falling.

The latest government figures show that 762,000 new homes were sold in 2021. That’s a big number, but it’s actually 7.3% lower than 2020 sales. Even with less production, inventory levels were just fine on the new-home front. There was a six-month supply at year-end with more than 400,000 new homes available.

In contrast, existing home inventory levels are contracting. The National Association of Realtors (NAR) said in December that “the inventory of unsold existing homes fell to an all-time low of 910,000, which is equivalent to 1.8 months of the monthly sales pace, also an all-time low since January 1999.”

What’s going on here? Why are new home sales are lagging?

Pricing

Existing homes are generally far cheaper than new construction. The median price for an existing home in December was $358,000 according to NAR – up 15.8% in a year. The average price was $374,800.

In contrast, the median sale price for new houses sold in December 2021 was $377,700. The average new home sales price was $457,300.

What these numbers tell us is that existing home prices – while up substantially during the past year – are generally lower when compared with new construction.

The differential becomes important when translated into down payments and monthly costs. Here’s how the costs vary for new and existing homes purchased with 5% down and a 3.55% interest rate over 30 years.

What do these price differences say to potential buyers?

First, average existing home prices – the total value of homes sold divided by the number of units – and median prices – where half the homes sell above a certain number and half are below – are fairly close. There is a $16,800 difference between the two figures.

Second, the difference between the average price for a new home and the median new home sale value is $79,600. That’s a huge gap.

Third, whether median or average values are considered, new homes are more expensive and cost is a huge issue for many households. According to NAR, “for households earning $75,000 to $100,000, there’s one affordable listing available for every 65 households — a stark decrease in availability from one affordable listing for every 24 households in 2019 for this income group.”

Fourth, higher mortgage rates may lie ahead. The Mortgage Bankers Association, for one, predicts that rates will reach 4% by the fourth quarter. Combine rising prices with higher mortgage rates and the inevitable result is still-higher monthly costs as well as less affordability for many potential purchasers.

First-time buyers

Pricing differentials are especially important to first-time buyers, a group likely to require mortgage financing with little down. That group, in particular, is being hurt by the fast pricing run-up.

“Younger consumers — more so than other groups — expect home prices to rise even further, and they also reported a greater sense of macroeconomic pessimism,” according to Fannie Mae’s Chief Economist, Doug Duncan.

“All of this,” added Duncan, “points back to the current lack of affordable housing stock, as younger generations appear to be feeling it particularly acutely and, absent an uptick in supply, may have their homeownership aspirations delayed.”

Affordability and inflation

“The central real estate problem today is affordability,” said Rick Sharga, RealtyTrac Executive Vice President. “Existing home values have soared, and new home builders have been forced to raise prices because of supply chain issues, the ongoing pandemic economy, and a severe labor shortage. In December, there were 337,000 job openings in the construction industry.

“Meanwhile,” said Sharga, “underlying everything has been inflation. The consumer price index was up 7% last year, the largest 12-month change since 1991. The result is a huge financial squeeze, even for many households with rising wages.”

Those who expect more affordability in the near future are likely to be disappointed. There’s no way to quickly manufacture the millions of new homes needed to end the housing shortage, the construction labor shortage will not soon end, and wages are unlikely to keep up with home price growth.

But, things can change. In particular, there are likely two items to watch.

First, if unloading issues along West Coast ports can be resolved, then many supply-chain issues will evaporate, including – perhaps – the chip shortage that has hobbled much of the auto industry, a major contributor to the cost-of-living index. With less inflation, the Fed will have less incentive to raise bank rates, and that’s good for mortgage borrowers and the market in general.

Second, as the Fed explained in 2020, “the path of the economy will depend significantly on the course of the virus.” Right now, as this is written, more than 210 million people have been fully vaccinated and daily cases are declining. We don’t know what will happen next, but maybe – just maybe – the worst is over, and the economy can begin the long journey back to normal.