Rising rates not only increase the cost to buy a home they also increase the cost to build a home. Justin Lahart in the Wall Street Journal writes that the housing slowdown is only exacerbating the market’s biggest problem: There aren’t enough homes…(Wall Street Journal)
A large number of homes are now under construction, but the worsening sales environment reduces home builders’ incentive to build more houses. On Monday the National Association of Home Builders said that its index of prospective buyer traffic for new homes hit its lowest level since 2015. On Tuesday the Commerce Department reported that both the number of homes started and newly issued building permits fell again in June. If anything, the housing supply problem could get worse.
This is a big problem. Many of the current doomsayers predicting the housing crash (for the 10th time in two years) are pointing to rising inventory levels. It’s important to remember that inventory levels were at record lows. When inventory levels pop up 10% month-over-month, that might seem like a drastic jump, but it’s not. Some overheated markets might be approaching normal levels but on the whole, we still have an inadequate level of homes…
Wednesday’s report showed 1.26 million existing homes were available for sale in June (unadjusted for seasonal swings), enough to cover three months of sales. That is the highest the months-supply figure has been in nearly two years, but it is still low historically speaking. The average June months-supply level in the five years preceding the pandemic was 4.5, and during that time the lack of housing inventory was deemed a problem.
Short-term this is a great situation for buyers. After two years of an extreme seller’s market, buyers are finally getting the upper hand in some negotiations. However, this is only short-term. Many Americans are locked in homes with 3% mortgages and a ton of equity. They have no reason to sell. If we want the market to reach an equilibrium in the long run we need builders to keep building at current levels. Looking at current trends, that does not appear to be in our future…