More housing would ease price pressure on the housing that exists; even housing that’s been permitted but not yet vertical.
Still, more new housing at lower price points would have an outsized effect on the vicious circle of escalating home prices and constrained for-sale inventory. The importance of this “leverage point” may get lost in the national, broad-strokes data prints and media coverage.
We’re going to explore why.
But first, let’s take a look at some analysis from Trulia chief economist Ralph McLaughlin on the question of why for-sale inventory levels are low.
Note, however, that McLaughlin’s insightful answers as to why this is the case are reasons. Which is to say, they’re not root causes.
For instance, an analysis of Trulia data reveals that the two primary reasons existing home supply is so tight are 1) that “lack of home building” and 2) investor buyers of existing home inventory suppresses its availability to individual buyers.
Ralph McLaughlin writes:
Across the largest 100 metros, every one percentage point increase in a market’s housing stock between 2010-2016 is, on average, correlated with inventory that is approximately 13% higher. For example, if the Los Angeles metro had increased their housing stock by 2.6% instead of 1.6% between 2010 – 2016, we could have expected their existing home inventory to increase from 10,181 homes on the market to 11,504 in 2017 Q3: an increase of over 1,300 homes.
In addition to new construction, and the impact of investor buyers on reducing inventory, three other explanations factor into suppressed inventory, McLaughlin finds: owners don’t want to sell if they don’t think they can buy another home, too many home-owning boomers can’t or don’t want to move, and owners who want to trade up can’t find an affordable home at the next level.
In each case, research shows a correlation to constrained supply, although in the case of homeowner boomers, the correlation is negative.
McLaughlin concludes that since home building far and away would have the most meaningful impact on inventory–along with investor owners–policy, taxes, and land use changes would draw the forces into a better, more positive balance.
In his conclusion, McLaughlin gets beyond the explanation for lower-than-normal, and less-than-healthy inventory levels, at some of the root causes.
If you conclude that lack of home building is the most important reason for this condition in the supply-and-demand equation, then you have to ask the reasons for the lack of new home building.
This circles back to two root causes. One is that policy, taxes, and land use are too onerous, and causing depressed new residential investment. Two, is that builders’ productivity levels can’t keep pace with ever-volatile, ever spiraling lots, labor, and lending variables to the point they can kick up their volume of entry-level communities and offerings, and sell them profitably.
The Z Report, a Zelman & Associates, twice-monthly news analysis on trends, events, and enterprise insight, looks at inventory, and sees an inordinate “unmet need” in the entry-level part of the price spectrum. For a free trial of The Z Report, click here.
“According to our monthly survey of real estate brokers, entry-level demand was rated at 89 on a 0-100 scale in June, demonstrating the insatiable appetite among first-time buyers. In comparison, the high-end of the market was rated at 57 — still strong but below the 74 average for all price points. At the same time, 71% of these brokers reported that entry-level inventory decreased year over year in June while high-end properties had an increasing bias.”
Entry level homes–or ones that are Americans’ gateway to homeownership opportunity–is the critical base, and the critical link in the chain of home purchase transactions so important to the economy.
So, is what’s good for housing good for home builders? It’s intuitive to think that a fundamental need described above as “the insatiable appetite” would be a great opportunity, teeming with players trying to exploit it.
If a player should crack the code of being able to produce compelling, quality, well-located homes and communities at price-points below where they are now, advantage should likely go to such a player.
We may be looking at an era where this possibility becomes a reality, where talk of scalable high-speed, high-efficiency production becomes action. If that happens, inventory levels would begin to swelll to normal, and pressure on prices would ebb.
