Housing Inventories Catching Up With Demand

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After years of demand outstripping supply, the housing market is finally loosening up. Builders are scrambling to put up more homes, and more homeowners are putting up for-sale signs. But the rebound will be slow and uneven.

Total housing starts slumped in June because of lower building activity across the nation. Total housing starts declined 12.3% in June to a seasonally adjusted annual rate of almost 1.2 million. Both single-family and multifamily starts fell. Multifamily starts declined 19.8% from May, while single-family starts fell 9.1%. Starts fell across the United States but dropped especially hard in the Midwest. Despite the recent slowdown in residential construction, it is moving in a positive trend. Permits for new, single-family homes rose 0.8% in June and are up 6.6% on a year-to-date basis. The size of new homes has been shrinking over the last two years because of a gradual move to add more entry-level dwellings. The rising cost of building materials, plus land and labor shortages, have left builders unable to ramp up construction, despite industry optimism.

See Also: A Housing Shortage Looms as Builders Can't Keep Up

New-home sales fell 5.3% in June to a seasonally adjusted annual rate of 631,000 — meaning they declined in two of the past three months. Despite that, the new-home market remains healthy. Sales are still up 2.4% from a year ago. The number of new single-family homes on the market increased slightly and is 10.3% higher than a year ago. It would take 5.7 months to sell through that inventory at today’s sales pace — the seventh consecutive month that the inventory-to-sales ratio has remained above five months. The median price for a new single-family home is declining in year-over-year terms, indicating that sales of entry-level homes are gradually increasing. New-home inventory is somewhat tight, but building activity is perking up. If this continues, price growth for new homes should continue to decline.

Existing-home sales continued to slide in June, but inventory improved slightly. These sales declined 0.6% from May to a seasonally adjusted rate of 5.38 million. Sales have slid for the past three months because of supply-side issues. Sales have dropped on a year-to-year basis for four consecutive months. Listings across the United States are up 0.5% from a year ago. Not a large gain, but up for the first time since 2015. In a quarter of the nation’s 500 largest metro areas, inventories are rising. That’s up 14% from a year ago. The supply of homes on the market, however, remains small relative to sales. With that somewhat scant stock, it would take 4.3 months at the current pace to sell through it. Properties stayed on the market for 26 days in June, unchanged from the last three months and down from 28 days a year ago.

Home values will continue to climb over the next year because of low inventory. The S&P CoreLogic Case-Shiller National Home Price Index rose 6.4% in May from a year ago, unchanged from the year-over-year gain in April. A moderate sales pace in relation to the scant housing stock is leading to high competition for properties and driving up prices across the nation. Western markets continue to see the largest gains, spurred on by booming populations and employment growth. Seattle saw the largest annual increase at 13.6%, followed by Las Vegas at 12.6% and San Francisco at 10.9%.

Mortgage rates have risen from their 2012 lows and will keep on climbing, to 4.8% on the average 30-year fixed-rate loan, from 4.54% today. Meanwhile, expect banks to remain stingy when it comes to home loans. Getting approved requires a substantially higher credit score now than a decade ago.

Sources:

• National Association of Realtors: Existing-Home Sales
  
• Department of Commerce, New-Home Sales
  
• Department of Commerce, Housing Starts