I have been reporting on new home sales for years and track this facet of the market with a great deal of interest as a Master in Residential Marketing through the NAHB. I find the new home market to be a strong barometer of what is happening with the market as a whole.
A stat released by the Census Bureau caught my eye this week – new home sales rose 26% from one year ago during the same time in April to 517,000 sales – the third highest month of activity in eight years. The numbers would have easily reached higher but couldn’t because there just wasn’t enough inventory to sell.
The national median price of these new homes was just under $300,000, almost 10% above last year’s price. From a national perspective this is a healthy increase due in part to the lack of inventory and the demand for new homes.
The challenge that occurs in a market that lacks new home inventory is that new homes will sell for significantly higher than resale, creating a big gap between new and resale. This is not healthy for the market. We should be adding inventory of 1.2 million per year!
We simply need more new home inventory. We are still only at about half of the production of new home sales as we were a decade ago. The total US housing starts for single family residences increased to 733,000 in April which is only 14.7% above April of last year.
The new home construction industry was hit very hard during the recession and we have yet to recover to where we need to, which will continue to put pressure on the resale market. However, due to the lack of new home sales inventory there is no concern over new home over-production. Basically speaking, at this point in the market, if it is built it is it going to be consumed. Yes, if you build it…they will come.
Builders have had a very hard time getting loans to ramp up building which is one of the causes of the inventory shortage. Lenders need to make more new construction loans or there needs to be better financial regulations to allow banks to make more new construction loans.
The good news for those builders who have the financing to get their projects above ground is they are going to sell. The demand is there, the supply is not, this is a formula for higher sales prices and lower market time.
The challenge is that buyers are noticing that new home prices have surged. With new home sales only reaching half of what they were a decade ago the demand continues to outweigh the supply. Buyers who want new construction will pay a premium in today’s inventory tight new home market.
With new home construction reaching this new shortage crisis I estimate that new home sales prices in high demand regions could rise by 30% in 2015 – YES, I SAID 30% – and I estimate there will be another 30% in 2016!
The perfect storm of inventory shortage and demand for new homes is just too strong and the prices will reflect this shortage. This is one of the most aggressive predictions I have ever made but I have been talking about new construction shortages for five years and I knew this day would come.
Today is that day!