For Now, Boosting Home Construction is Best Way to Address Inventory Shortage

The pandemic has resulted in unprecedented demand for single-family homes – in particular detached homes with amenities such as swimming pools, outdoor patios, fire pits and plenty of room for social distancing.

Unfortunately, there is very limited supply, especially in the lower price brackets; a problem that has been plaguing the housing industry for years – but which has become amplified by the COVID-19 crisis.

And, as much as we are all looking forward to 2021, it doesn’t look like we can expect home construction to catch up with demand in the year to come.

“As more and more potential home buyers rush to take advantage of sub-three percent mortgage rates in an environment of limited homes available for sale, multiple-offer bidding wars become the norm and prices are pushed higher,” explains Mark Fleming, chief economist for First American, in a recent report.

As Fleming explains, the housing market’s ‘big short’ in supply isn’t going anywhere anytime soon.

“Despite the best intentions of home builders to provide more housing supply, the big short in housing supply will continue into 2021 and likely keep house price appreciation flying high,” he says.

At least the home building industry is moving in the right direction.

“In October, housing starts increased 14 percent compared with a year ago, and new home sales were approximately 1 million (SAAR) in September and October,” Fleming says. “This is a positive sign of potential new supply under construction, but it’s unlikely to change the supply dynamic quickly. The U.S. housing supply has been under-built for over a decade and it will take years of accelerated new home construction to close the gap.”

As shown by First American’s Real House Price Index (RHPI), the lack of supply is not only driven by lack of new home construction but also by lack of turnover in existing-home sales.

As would be expected, the pandemic has resulted in longer-than-normal homeowner tenure rates.

Fleming says if there aren’t enough existing-homes available for sale to meet demand, then the only solution, for now, is for home builders to add more inventory.