Another factor in the current low housing inventory is the significant decrease in homebuilding. The struggles of the housing market have given investors little incentive to build new homes. In the past few years, many prospective housing developments have stalled or seemingly disappeared as investors fled the market. New home construction was hit hard in the housing crash, after all, if the economy is struggling, existing home values are plummeting, homeowners are stuck in underwater mortgages, and foreclosures run rampant, how much of a demand can there be for new homes? How much can new homes be worth? Who has the money to build them in the first place, and just wait around in the hope of a decent sale?
The economic downturn hurt the new home market even harder than the existing home market. Many homebuilding companies were forced to stop or scale down projects from lack of funding, and the lack of profitability forced many companies out of business. As RealtyTimes summarized from a recent John Burns Consulting report, “The economy stunted new home growth as debt and equity capital for new home construction became more difficult to obtain than a new mortgage.” This means that now only are there now fewer new homes being built, there are fewer people around to build them.
Market experts and Wall Street investors look to the New Residential Construction Report, or “housing starts” to indicate the health of the housing market. The report gathers statistics for new home construction, namely building permits applied for, starting home construction, and completed home construction. February’s data indicates small increases over January. While housing starts are significantly higher now than a year ago, new home construction has yet to take off.
Indicators in the housing market predict that it’s only a matter of time before new home construction takes off, despite the slow start to the year. Many point to the coming spring weather improvement to host a boost in home construction. The time to build, analysts say, is now. Existing home sales are stalling under a shortage of homes for sale. The bank-owned shadow inventory is only slowly moving toward the market, and existing homeowners are holding out for the return of home values that help them break even or see a profit for their equity. With such a shortage of inventory, only new homes can fill the gap and strengthen the market and ease the negative equity. New homes are the beginning of a cycle that will bring existing homes back to the market and return housing to normal healthy levels.
New homes historically make up 13% of the housing market according to Burns, but are currently accounting for only 7% of home sales. While private builders suffered and closed, publicly traded builders have held on, and the top twelve builders grew more that 20% in 2012. This positions them to expand and build in 2013 to meet the rising demand for homes and ease the short supply.
A rise in new home construction will be good news for the housing market and for the general economy. Housing starts are a “leading indicator” for economic growth, supplying construction jobs and material sales and foretelling increased demand for housing-relates consumer goods like furniture, appliances, and yard supplies.
So, the answer is yes: if you build homes, buyers will come. And that is good news for everyone.
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About Tom Davidson — Tom Davidson is Vice President of Colibri Real Estate, LLC. which operates online education providers Colibri Real Estate, Insurance License Express and License Tutor. Follow him on Twitter.