Lack of housing inventory holding back new home sales

Homebuilders not producing what buyers want

New home sales increased in June by 0.8% from May and 9.1% from last year to 610,000 sales annually, however this growth will be limited if homebuilders don’t start to produce homes buyers are calling for.

While new home sales increased over the past two months, one expert explained they will be limited if builders don’t start selling homes to first-time homebuyers.

“The market for new homes is facing a growing imbalance between what buyers want and what homebuilders are producing,” said Tian Liu, Genworth Mortgage Insurance chief economist. “And this is the biggest bottleneck facing the housing recovery today.”

“Demand from potential first-time homebuyers is strong,” Liu said. “They are buying homes priced between $200,000 and $300,000. Unfortunately, the supply of new homes is yet to catch up in this price range, which will limit new home sales to around 620,000 units.”

Other economists agreed the increase in new home sales was held back by a lack of housing inventory, but explained other areas of the housing market are being hit much harder by the inventory shortages.

“This is the fourth month out of six in 2017 with sales above 600,000 – putting new home sales on track for the strongest year since 2007,” Nationwide Chief Economist David Berson said. “Although low inventory levels are holding new sales down, the impact has been less than that for existing sales.”

So just how low are new home sales, compared to their 50-year average? One expert has the answer.

“Though home buyers continue to snap up new homes, there is much room for growth,” Trulia Chief Economist Ralph McLaughlin said. “When taking into account the size of the U.S., new home sales are still about 30% below the 50-year average. But the signs for home builders are clear: if you build, they will come.”

The chart below shows the total new home sales over the past 50 years.

Click to Enlarge

New home sales

(Source: Trulia)

However, one expert said the lack of inventory is doing just the opposite – driving new home sales up.

“The inventory squeeze that's driving sales of existing homes down seems to be acting as a decent pick-me-up for the new home sales market, with some of those buyers unable to find an existing home to buy last month likely turning to the new construction market,” Zillow Chief Economist Svenja Gudell said.

But Zillow seems to be alone in its observation as most other economists agree housing inventory is holding back new home sales.

“The marginal 0.8% m/m rise in new home sales in June provides further evidence that sales volumes are struggling to gain momentum despite the fact that new homes are selling at the fastest pace since records began,” Capital Economics Property Economist Matthew Pointon said. “Higher volumes will require a shift to building cheaper starter homes.”

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