Home Builders Thrive Amid Shortage in Resale Home Supply
The housing market is experiencing a unique phenomenon, where home builders are poised to thrive in the coming years due to the scarcity of resale homes. With higher interest rates and people opting to stay locked into their low-rate mortgages, the supply of resale homes has diminished. In this article, we explore the reasons behind the shortage and how home builders are capitalizing on this situation to meet the growing demand for new homes.
1. The Impact of the Shortage in Resale Home Supply:
The shortage in the supply of resale homes has had far-reaching consequences on the housing market. With fewer homes available for purchase, potential buyers face limited options and increased competition. People simply cannot buy homes that never come back on the market due to higher interest rates. Furthermore, these rates are unlikely to come down quickly, as inflation remains high, indicating that they will likely stay elevated over the next 1-3 years.
2. Preventing Price Decline in Desirable Neighborhoods:
In areas like Los Angeles and Orange County, the shortage in housing supply has prevented home prices in desirable neighborhoods from falling. Typically, during a recession, prices decline due to a rapid increase in housing supply and foreclosures. However, this time around, such factors are not as prevalent, leading to a sustained stability in prices. Home builders are well-positioned to cater to the demand in these coveted areas.
3. Inflation, Affordability, and Locked-In Mortgages:
Historic levels of inflation in Southern California have caused housing prices to soar, resulting in lower affordability for prospective homebuyers. As interest rates were raised rapidly to combat inflation, mortgage rates also increased, even though the Federal Reserve rate does not directly affect them. The higher rates have made housing costs 30-40% more expensive per month compared to a few years ago. Consequently, homeowners are reluctant to sell unless presented with a great opportunity, a pressing need, or a substantial decrease in rates. Most choose to stay locked into their low mortgage rates, leveraging their equity through a Home Equity Line of Credit (HELOC) if necessary.
4. Advantages of Home Builders in Los Angeles and Orange County:
Home builders in Los Angeles and Orange County are in a prime position to capitalize on the current market dynamics. They can provide additional supply by fulfilling the orders for new single-family homes, townhomes, condos, and more. Unlike homeowners selling their lived-in properties, home builders offer various incentives such as rate buydowns, appliances, closing costs, and material upgrades. This advantage gives homebuyers considering new homes an opportunity to purchase with minimal competition and enjoy lower maintenance costs during the first 10 years, thanks to the builder's warranty required in California.
5. Low Home Seller Activity and the Need for Increased Construction:
Home sellers have been less active in recent times, with a 25.7% decrease in newly listed homes for sale compared to the previous year. This scarcity in supply exacerbates the need for increased construction to meet the housing demands of California's growing population. In fact, a report issued by California's Department of Housing and Community Development in 2000 estimated that the state would need to build 220,000 additional units each year for two decades to keep up.
However, this goal has yet to be realized, with construction falling roughly 100,000 units short of the target even during a relatively high-water mark in recent years.
The shortage in the supply of resale homes, driven by factors such as higher interest rates and homeowners staying locked into their low-rate mortgages, presents a unique opportunity for home builders. Builders can cater to the demand and provide incentives, making them an attractive option for homebuyers.