Are We Running Out of Homes?

The Mortgage Corner

This isn’t a repeat of the housing bubble, as some pundits would have us believe. In fact, it’s the opposite. Too few homes are being built, and existing inventories of homes for sale have fallen to 2 million homes—whereas more than 4 million existing homes were for sale at its height.

Inventories are literally back to 2001 levels, before Fed Chairman Greenspan engineered record low interest rates for that time that created the incentive for the oversupply of housing and consequent Great Recession. This time we have just 4.8 month’s supply at today’s sales rate.


Graph: Calculated Risk

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, fell 3.4 percent to a seasonally adjusted annual rate of 5.36 million in October from 5.55 million in September, said the NAR. Despite last month’s decline, sales are still 3.9 percent above a year ago (at 5.16 million).


Graph: Calculated Risk

The real problem is not enough new homes are being built, with housing starts slightly over 1 million annually, but permits for future homes at 1.2 million plus, a good sign for future growth. Lawrence Yun, NAR chief economist, says a sales cooldown in October was likely given the pullback in contract signings the last couple of months.

“New and existing-home supply has struggled to improve so far this fall, leading to few choices for buyers and no easement of the ongoing affordability concerns still prevalent in some markets,” he said. “Furthermore, the mixed signals of slowing economic growth and volatility in the financial markets slightly tempered demand and contributed to the decreasing pace of sales.”

Builder optimism is still high at 62 percent, as we said last week, which also should mean more new construction. Though builder confidence in the market for newly constructed single-family homes slipped three points to 62 in November from an upwardly revised October reading on the NAHB/Wells Fargo Housing Market Index (HMI), it is still robust with traffic wanting new homes.

“All-cash and investor sales are still somewhat elevated historically despite the diminishing number of distressed properties,” adds Yun. “With supply already meager at the lower-end of the price range, competition from these buyers only adds to the list of obstacles in the path for first-time buyers trying to reach the market.” Weakness in this reading has been reflecting lack of first-time buyers in the market, until now.

So why are builders still optimistic with still low new construction numbers? A tremendous pentup demand, in a word. Over the past seven years, NAHB Chief Economist David Crowe estimates the slow recovery and uncertainty in the job and housing markets resulted in 7.4 million lost home sales.

“While some of these sales will never take place, this does indicate how many sales were lost as fewer households decided to move. We expect at least some of these to return in the form of new home sales as job and economic growth continue to firm.”

He says a key demographic to help jump-start this process should come from the millennials, as we have been noting over the past years (ie, those from 18 to 36 years). The share of first-time home buyers has traditionally averaged around 40 percent, but in the aftermath of the housing downturn it now stands at just under 30 percent. This is while household formation is finally returning to a more normal level of 1 million plus. First-time buyers are expected to provide a boost to the housing market, as the unemployment differential between young people and others is shrinking.

Harlan Green © 2015

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About populareconomicsblog

Harlan Green is editor/publisher of, and content provider of 3 weekly columns to various blogs--Popular Economics Weekly and The Huffington Post
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