Fewer resales available, at higher and higher prices, mean what?
Trulia chief economist Ralph McLaughlin paints a lurid picture with data points in this analysis he titles, “Don’t Call it a Comeback.”
He offers a contrarian take on the numbers, asserting that “home value recovery” is limiting supply, opposite to the view many other observers would take, that limited inventory forces up prices.
Net net, the canvas shows a vortex of unmet need in the starter home segment of the market. No surprise there, but the data is telling. McLaughlin notes that while overall used home inventory has declined eight quarters running, and fell 5.1% year on year coming into 2017, counting for starter homes alone, there’s a much sharper drop. McLaughlin writes:
The number of starter homes on the market dropped by 8.7%, while the share of starter homes dropped from 26.1% to 25.9%. Starter homebuyers today will need to shell out 2.9% more of their income towards a home purchase than last year.
In other words, while it took 35.4% of a would-be buyer’s income to afford a starter home in the first quarter of 2016, the amount people need to commit this year to get into starter homeownership is 38.3% of their household wages. An Owners.com survey, confirming that nearly three-quarters of would-be buyers are in a state of high anxiety about trying to make a purchase, reports that more than half of them say they’d pay more than they’re actually budgeting to to land a deal.
What’s more, following through on Ralph McLaughlin’s logic, he applies a geographical filter to his theory and concludes:
We find a negative correlation between how much a housing market has recovered and how much inventory has changed over the past five years. Using the current value of the housing market relative to the peak value as our measure of recovery, we find markets with greater home value recovery have experienced larger decreases in inventory over the past five years.
We all know too that new-home inventory in the $175k to $225k range is in the 3-months’ supply range, vs. a 5-months’ supply for higher price tiers.
David Auld, ceo of D.R. Horton, whose Express Homes entry-level brand accounted for 28% of the No. 1-builder’s unit volume in 2016, selling to buyers for an average of $215,000, puts the challenge, and the opportunity, this way.
“You can turn a B or C land deal into an A subdivision with execution. If we miss the absolute best land deal opportunity of all time, I don’t care. I know we can make it up on the land deals we get, because we’re going to make up for it with operational excellence.”
This is how “new” becomes the solution, through operational and executional performance that will go straight at the unmet need existing home sales and supply create, and meet it. Risks to housing being what they are, new homes–especially in the below $250,000 range where D.R. Horton sells half of its homes–can exert a positive force on overall supply, and can work as a counterbalancing effect on the phenomenon McLaughlin’s been observing in the housing market. They can become housing’s more affordable option.
