Happy Days for Homebuilders Should Continue for a While

The housing resale market has been a tough one, with mortgage rates the highest they’ve been in recent history and low inventory, current owners frequently have low-rate mortgages and aren’t looking to trade one for the other, and many owners are in a demographic where the likelihood of selling and moving to another house drops significantly.

That’s been good news for homebuilders, as Rick Palacios Jr., director of research and managing principal, and Dean Wehrli, principal, at John Burns Research and Consulting, discussed on a recent podcast.

As in basic economics, supply and demand interact. When there isn’t enough supply, there’s room to create more. That is what’s been happening in housing. The market for homebuilders is much better now than anyone had expected at the beginning of the year. With resale supply being low, people who want to buy have to move to new.

Palacios mentioned a 40-year analysis the firm had done. “The ratio today of owned housing units for sale to total owned housing units, we’ve only got one million listings in the system, and you got 86.1 million owned housing units in the entire U.S.,” he said. “That’s the lowest ratio right around that we’ve ever seen in the history of US housing.” Currently, about 1% of all owned housing units are for sale, where the historical average is 3%.

In July, new homes sales were “29% above what we would think of as a normal pace of sales in July from 2013 through 2019,” Palacios said. “Starts are accelerating. I think those are up about 15% year over year. And prices are steady, not really shooting through the moon by any means, but not collapsing. They’re just kind of flatish up 2% year over year.” Builders are keeping prices flat on a month-by-month basis, so a “year of volume over margin and price appreciation.”

A third of the demand has been from entry-level buyers, who are driven by life issues, such as looking at rent growth, whether they’re married, need more space, or having kids. Palacios said that “builders have been able to really pivot there and provide more homes that are in this affordability price band through a lot of different techniques, dropping prices, lower square footages, all kinds of things. That’s at the core of why I think new home has outperformed on the existing side.”

Eventually things will shift, as people who bought at 5% to 7% mortgage rates will have adjusted to them and considered it normal and not be the anchor that people buying at a sub-4% rate would feel. But there is still room for more new home sales while resales dynamics work their way out.