As we are all aware, the housing market has softened considerably with the number of existing homes available to buy close to record lows. Let’s talk about supply and how the market is starting to adapt to low inventory levels.
This chart shows the average number of homes on the market by year, and though, year-to-date, we have seen a little bit of an uptick, it’s clear the country remains supply-starved.
And with just over three months of inventory — as opposed to the normal four to six — the market is clearly out of balance.
But even though inventory levels have risen nationally, as I’ve said many times before, not all markets are equal.
This chart shows how supply levels have changed. The data here is representative of the 100 largest metropolitan areas in the country.
The horizontal axis shows the change in inventory versus the second quarter of 2022, while the vertical axis shows the difference in the number of homes for sale versus the second quarter of 2019. I think you’ll agree that the difference is stark.
Although two-thirds of the metropolitan areas have seen the number of homes for sale improve versus the same period a year ago, just one — Austin, Texas — had more homes for sale higher in the second quarter of this year than it had in the second quarter of 2019.
And even more stark was the fact that inventory levels in 53 of the 100 largest metropolitan areas were down by more than 50 percent compared to the same period three years ago.
Interestingly, on a percentage basis, smaller metro areas saw the greatest decline versus three years ago. For example, in Hartford, Connecticut, the average number of homes on the market in the second quarter was just over 900, and that’s down by 80 percent from the second quarter of 2019 where there was an average of over 4,400 units for sale.
Supply levels were down by 78 percent in Stamford, Connecticut, 75 percent in New Haven, Connecticut, and 74 percent in Allentown, Pennsylvania.
It’s true that supply levels are generally higher when compared to a year ago, with the greatest increase being seen in select markets in Florida, Tennessee, Texas and Oklahoma; however — other than in Austin — supply levels remain well below their long-term averages.
So how is the market adapting? The answer is rather interesting. Even with all the talk of escalating material, land and labor costs, it’s the new-home industry that has been taking advantage of the lack of housing supply.
This chart shows the share of new homes on the market compared to their resale counterparts, and here, we are just looking at single-family homes.
Historically, new construction makes up roughly 10 percent of active listings at any one time, but as you can see here, that share has been rising not just since the end of the pandemic but for the past several years. Although off the high seen a few months ago, 30 percent of the single-family homes for sale this July were brand new.
I find this particularly interesting because, historically speaking, buyers have paid a premium to buy a new home rather than an existing one.
As you can see here, the spread in median sale prices — which was pretty stable from 1990 until the bursting of the housing bubble — grew significantly starting in 2011, and in 2022, the premium averaged 16 percent.
But when we look a bit closer at the numbers, well, that gives us a somewhat different picture.
You can see here the spread has dropped to just 6 percent and, in June of this year, the difference was a mere $1,000.
With the share of new homes for sale holding at a four-decade high, the share of sales themselves is at a level we haven’t seen since 2005.
But even though we know that there is demand for housing, shouldn’t sales be constrained by mortgage rates?
Well, what is happening is that builders are attracting buyers through incentives, like mortgage rate buy-downs, which are becoming increasingly prevalent across the country.
In fact, a recent survey from John Burns Consulting suggested that 30 percent of homebuilders reported using interest buy-downs more in the second quarter of this year than they had previously. This is attracting buyers to visit new development communities.
An example of these buy-downs is the 2/1 program that DR Horton, the largest homebuilder in the country, is offering in some communities. This program gives buyers a mortgage rate that starts at 3 percent for the first year, rises to 4 percent in year two, and then goes to 5 percent for the balance of the 30-year term. That’s pretty compelling given where mortgage rates are today.
The bottom line as far as I can see it is that the new-home industry will continue to take an outsized share of the market for the balance of 2023 and likely through most of 2024. That said, once the market starts to normalize, I expect builders to pull back from these incentive programs and be more likely to start raising asking prices — and we will return to the traditional spread between the prices of new and resale homes.
Although it’s pleasing to see more homes being built, I believe that the country will still be running a housing deficit when it comes to meeting demographic demand, and this will continue to hurt first-time buyers who continue to be priced out of the market.