Homebuilders continue to finish homes faster than they’re starting new ones. Improved supply chains are allowing them to work through backlogs built up during the pandemic when they couldn’t keep up with demand. But as mortgage rates north of 6% and broader economic risks chill buyer interest, builders also remain cautious.
Maybe too cautious, judging by the continued lack of inventory in the existing home market. To keep the new-home pipeline on par with 2019 levels — arguably still too low given the lack of supply in the resale market — builders need to boost housing starts by around 20%. That’s probably not a conclusion they’ll be drawing quite yet given all the scares the shifting housing market has given them over the past year.
So expect another inventory crunch in the new-home market by the middle of 2024.
It’s hard to convey just how dire things have gotten in the resale market, but I’ll give it a try. Remember how people rushed to relocate during the pandemic, fueled by stimulus dollars and mortgage rates below 3%? That booming demand ate up housing inventory, pushing the number of existing homes for sale down sharply in the first half of 2021.
Now skip to 2023. Through mid-April, resale inventory has fallen faster than it did in 2021. And it’s still falling, in contrast to 2021 when inventory began to rise again in April, as it usually does.
The reasons for the decline are completely different in this go-round. Start with the fact that demand is much weaker. But mainly it’s because homeowners refuse to sell their homes in this market. Historically, at this point in the year we would expect 100,000 or so new listings every week, which is what we got in 2021 and 2022. Now we’re getting more like 80,000, and they’ve been running consistently 20% lower for the past several months. Buyers have very few opportunities to buy if sellers won’t sell.
The one refuge for buyers has been in the new-home market, which is why the excessive caution of the homebuilding industry is so concerning as we look ahead. At the moment, builders still have a lot of homes under construction because they increased production to meet strong demand during the pandemic, and because supply chain delays dragged out the completion times for those homes. In 2019, there were around 500,000 single-family homes under construction in the US. That number ballooned to more than 800,000 around this time last year, and it’s now hovering a bit above 700,000 as builders continue to sell down that pandemic inventory.
But what looked in 2022 like a potential glut of homes is going to turn into a shortage sooner rather than later. At current activity levels the US homebuilding industry is completing 200,000 more homes annually than it’s starting. It takes about a year to build a home. So that means we'll be back to 2019 levels of units under construction by next spring, and have far fewer existing homes for sale than we had back then.
It may seem like getting back to 2019 levels in a lot of areas of the economy would be fine — once we get there we can assess where we go next. But housing has well-known lags between the decision to build homes and when they’re completed. Single-family housing starts have risen modestly in recent months as builders realize market conditions today are stronger than they were at the end of 2022, but starts are still 20% below the pace of completions. At the current trajectory we’re not just on track to get back to 2019 inventory levels, we’re poised to keep falling. Holding at 2019 will require homebuilders to ramp up construction by 20% — and soon.
It’s earnings season, so builders are about to tell us what they’re thinking about the state of the market and their production plans. And while they’ll likely offer up some cautiously optimistic commentary, I’m not anticipating any newly aggressive stance. The likelihood that construction will pick up somewhat in the months ahead will help support the economy, but it won’t be nearly enough. The new-home market will join the resale market in dire-shortage territory by mid-2024.
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