The way the housing cycle is supposed to work is: The official kickoff of the spring homebuying season for families seeking newly built houses should come in February, long before the March’s vernal equinox marking winter’s end.
The annual pickup in foot traffic at construction sites is watched by housing economists as an early gauge for a year’s overall housing demand.
Traditionally, new-home buyers start shopping on the weekend after Super Bowl Sunday, because that’s when spouses of football fans can finally drag their significant others away from TVs to view model houses. It takes five or six months to build a new home, and families with children want to be moved in before the start of the school year in September.
Then, in late March, comes the next and far bigger wave. Existing-home buyers, who account for about 85% of all U.S. home sales, start tire-kicking in earnest as the weather improves. It only takes about a month or two to complete the purchase of an existing home, so those buyers have more leeway in planning a move that will have them in place before their kids start the new school year.
The existing-home spring buying season, the period when more than half of all U.S. home sales happen, runs from late March through the end of June. By July, families with kids are thinking about beaches, vacations and camp schedules, not granite countertops.
But, we don’t live in typical times. A record low in the supply of homes for sale had buyers turning out in force to look at new construction long before this year’s Feb. 2 Super Bowl.
The volume of mortgage applications for the purchase of new homes jumped 39% in December, compared to a year earlier, according to the Mortgage Bankers Association.
And, an index measuring the amount of foot traffic going through model homes in the first half of January rose to the highest reading for the month since 1994, according to data from the National Association of Home Builders.
Hmmm. What was happening 26 years ago, besides figure skater Nancy Kerrigan getting clubbed in the knee and O.J. Simpson fleeing police in his white Ford Bronco? On the real estate front, there was a shortage of homes on the market.
In the month prior to that 1994 surge of traffic touring builders’ developments, inventory had fallen to a 12-year low, according to the Commerce Department.
The demand we’re seeing this year, evidenced by the early spike in people touring model homes, will encourage builders to break ground on more homes.
“The housing market is seeing signs of a more significant recovery in new residential construction, which is a promising sign for prospective homebuyers,” Joel Kan, MBA’s associate vice president of economic and industry forecasting.
In other words, homebuilders are beginning to get off the sidelines and breaking ground on more houses, which is good news even for those people who want to buy existing homes.
“The demand is there, the household formation reflecting that demand is there, and consumer attitudes are near an all-time high,” said Doug Duncan, chief economist of Fannie Mae. “All of those conditions suggest it should be a strong buying season based on right kind of fundamentals.”
Families looking for a quaint Victorian with a wrap-around porch or a century-old Craftsman Bungalow-style home will have an easier time getting what they want if there’s a bigger supply of new homes to dilute the competition.
While homebuilding typically leads the U.S. economy out of a recession, the housing bust in 2008 was so bad it left many in the construction industry reeling even a decade later, said Lawrence Yun, NAR’s chief economist.
“Many small-time builders are still out of the game,” Yun said. “It was small-time builders in the aggregate that built many more homes than the big builders, and they’ve hesitated to get back in, even though it appears there is a money-making opportunity.”
A dearth of new supply has driven up prices for everyone, including existing home buyers, and stifled sales at a time when low mortgage rates and strong household formation has boosted demand.
In December, home prices climbed 6.9% year over year, according to Redfin. That’s more than double the increase in wages in the same period.
“We must continue to beat the drum for more inventory,” said Yun. “Home prices are rising too rapidly because of the housing shortage, and this lack of inventory is preventing home sales growth potential.”
The so-called “months supply” data that measures how long it would take to sell off the existing stock of homes fell to 3.7 in November, according to the National Association of Realtors. Most economists consider a six-month supply to be a balanced market.
Another way of measuring inventory is the number of homes on the market. In November, there were 1.45 million existing single-family homes for sale, the lowest level for that month in a NAR data series that goes back to 1982, Yun said.
But to understand why some people use the word “crisis” when referring to the housing shortage, consider this: The U.S. has added 96.5 million people in the 37 years since November inventory was so low.
“We’re at 30-year lows for existing home supply if you adjust by population, and that has to be made up by builders,” said Fannie Mae’s Duncan.
Help is on the way, according to all the major U.S. housing forecasters. Single-family housing starts likely will total 1 million in 2020, the highest since 2007, the NAR said in a forecast last month.
While forecasts from Fannie Mae, Freddie Mac, and MBA have that number a bit lower, all of them put it at a 13-year high that leaves recent years in the construction dust.
In the five-year period that ended in 2019, the average was 822,000 a year, according to government data. As a measure of what might be considered normal, from 1958 to 2007 single-family housing starts averaged 1.1 million as the population expanded.
The dearth of homes on the market is “clearly due to inventory shortage at the lowest price point,” Yun said. “Some of the trade-up buyers, who often are buying new homes and releasing that entry-level existing home inventory to the market, aren’t making a move.”
But, adding new supply to the mix this year will help to change that, Yun said.
