There are tons of newly built homes – just the wrong kind

Ask anyone house hunting this spring, and they’ll tell you there are far too few homes for sale. But, really, it’s the price tags of the homes for sale that are the issue.

It seems like a very simple fix. Not enough homes? Build more. Builders are doing that, but they’re not building the right kind of homes.

Builders say they are now targeting the millennial buyer — launching new, slightly lower-priced brands and stripping down the models — but clearly, it’s not enough. The supply of existing homes for sale is near a record low, but the supply of newly built homes for sale just jumped dramatically, returning to its 30-year average. The chasm between the two is all about prices.

“There was a big drop in the number of sales for [newly built] homes priced above $500,000 to the lowest since November,” wrote Peter Boockvar, chief market analyst at The Lindsey Group. “There was no change month over month in the number of homes sold priced below $300,000, which is the area of the market that most needs more supply.”

The median price of a newly built home sold in April fell 4 percent compared with a year ago, according to the U.S. Census, but that is not because builders have suddenly put up cheaper homes. It has to do with the mix of homes that are selling.

Most of the demand is among younger buyers with more limited cash and credit. Builders say they can’t lower prices much or build cheaper starter homes because of the high costs of land, labor and materials. They say the margins are just too thin.

“Some of the regulatory issues that have been put in by state and local governments, some of the capital constraints that the independent builders are facing, the labor shortages in a lot of markets, have all conspired to make this a very difficult recovery for new-home builders,” said Rick Sharga, chief marketing officer at Ten-X, a real estate auction company.

More evidence of the rift between what builders are putting up and what buyers can afford: inventory is suddenly high when builders are still not even close to normal production levels.

“How many new-home sales do we need for the market to look normal?” asked Ralph McLaughlin, chief economist at Trulia. “If we compare the share of new-home sales to total sales, that share needs to more than double. In April, new-home sales made up about 11.9 percent of all home sales, which is a little more than half of the historical average of 23.6 percent.”

True, luxury homebuilder Toll Brothers reported better-than-expected earnings for the quarter ended April 30. CEO Douglas Yearley called it, “The best spring selling season in over 10 years.” But even Toll’s average sale price fell slightly, as it began offering a new line of slightly more affordable homes called T-Select.

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