Four years in active recovery, and the housing market can’t seem to get past the inventory shortage that penetrates into all crevasses of the industry. And while this won’t change this year, there may be hope for next year as builders start to play catch-up.
“One important issue that has restrained sales and starts is inventory. On an absolute basis, inventory has not expanded as much as in past recoveries, leading to less selection for buyers. This is especially true for existing home sales but is evident for new home construction as well,” according to the latest report from Fitch Ratings titled "When it comes to U.S. housing inventory, more is better."
The most recent existing-home sales report from National Association of Realtors said that total housing inventory at the end of December dropped 12.3% to 1.79 million existing homes available for sale, and is now 3.8% lower than a year ago (1.86 million). Meanwhile, unsold inventory is at a 3.9-month supply at the current sales pace, down from 5.1 months in November and the lowest since January 2005 (3.6 months).
Homebuilders exhibited some optimism for the coming months in the latest National Association of Home Builders/Wells Fargo Housing Market Index.
“Though builders report the dip in confidence this month is partly attributable to the high cost and lack of availability of lots and labor, they are still positive about the housing market,” said NAHB Chairman Ed Brady, a home builder and developer from Bloomington, Illinois, said about the NAHB report. “Of note, they expressed optimism that sales will pick up in the coming months.”
Fitch attributes part of the lack of inventory to the limited supply of better-located lots suitable for the trade-up market.
“In general, broad lot development has lagged as many land developers left the industry during the downturn and those remaining were cautious or financially constrained in their subsequent development activities,” the report said.
However, this could finally start to change. According to Fitch, more recently, additional capital has been committed to land development, but the sector is still playing catch-up.
“Looking to 2016, at least a few public builders are opening or planning to open subdivisions in outlying communities and offering more affordable housing targeted to first-time buyers, including MDC, Meritage Homes and, especially, D.R. Horton,” Fitch stated.
“However, we do not see indications that meaningfully higher industry inventory, new or existing, will be available this year than was the case in 2015. Incidentally, public builders do have sufficient land under control to support considerably greater product offerings,” the report added.
For the year, Fitch projects that new home sales prices (as measured by the Census Bureau) will rise 2.0%-2.5% as somewhat lesser sales gains in high-price coastal markets and some increase in the share of total new home sales to entry-level/first-time homebuyers counters the effect of limited inventory.
Capital Economics reported similar news at the end of last year saying, “A lack of housing inventory continues to drive developments in the market. As demand has slowly recovered, low inventory levels have weighed on home sales and put upwards pressure on house price.”