The 3 Reasons Why New Homes Remain in Short Supply

by Peter Thomas Ricci

The supply of newly built single-family homes remains quite low; why is that?

Last week, we reported on the lackluster new home sales report, which found that sales of newly built single-family homes fell by 8.1 percent from May to June and 11.5 percent from June 2013.

One of the more striking results from the report, though, was the low supply of new homes. Through June, there were only 47,000 new homes completed and ready to sell.

Why is the supply of new homes so darn low, given how low existing inventory remains? Here are three reasons to consider:

1. Lagging Demand – The biggest reason for the low supply of new homes is likely low demand; simply, there aren’t enough consumers on the market to warrant additional home construction, a fact that David Crowe explained to Dina ElBoghdady of the Washington Post. “They’re not building any more than they know they can sell,” Crowe said.

And indeed, all one has to do is look at the make-up of the new home marketplace for the reason why. The median price of a new home was a whopping $273,500 in June, as builders tweaked their offerings for high net worth consumers. Now that housing demand is down from that demographic, though, builders have responded in kind by lowering supply.

2. Scarce Labor – Of course, lagging demand is just one of the challenges homebuilders face, and scarce labor is perhaps the most persistent. During the worst stages of the housing downturn, many a construction worker fled the homebuilding sector and transitioned to other jobs in manufacturing and especially energy; and as if that weren’t enough, the workers who stayed are now an increasingly aged lot, and the industry has had trouble attracting younger workers – thus, labor costs have risen.

3. Timber! – In addition to higher labor, the prices of building materials are also on the rise. The price of softwood lumber, for instance, is up from a year ago, and the price of gypsum (which is used for drywall) is up 7 percent year-over-year. In any other industry, the higher costs would simply be passed to the consumer, but courtesy of their higher prices, new homes sell at a 20 percent premium to existing homes, which puts a whole lotta pressure on the builder’s final price.

4. Lots of Lots? – Finally, the supply of available land is low, and builders often run into permit problems in land-constrained regions. According to David Crowe, the lead time for securing available lots can stretch into two or three years, and we’ve seen housing starts fall as a result; in June, starts were down 9.3 percent.

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