Is housing inventory as tight as some analysts believe?

September 26th, 2014

While new home sales are slower, builders are offering a lot of incentives to buyers.

Shortages of homes for sale have been noted in various housing markets across the country during the economic recovery, but supply could actually be outpacing demand, according to Trulia Chief Economist Jed Kolko.

Kolko analyzed data from the U.S. Census Bureau and determined there may be more single-family homes being built than people who want to buy them. This trend has been attributed to the slow rate of household formations, which hasn’t kept pace with the growing construction sector.

Single-family housing starts in 2014, for instance, have already outpaced total starts for 2013. Recent data from the Census Bureau revealed builders broke ground for 643,000 new homes in August, and housing completions rose 3.9 percent year over year. Kolko noted the current pace of construction is still below pre-housing bubble rates, but it is still a better pace than what demand would dictate.

Although this trend signals some issues in the housing market, it indicates opportunity for homebuyers. The Demand Institute recently reported millennials are anticipated to see a sharp incline in household formations by 2018, which will increase demand. However, until that time, the market is ripe with choices for buyers.

Consumers can take advantage of builder incentives
In addition to low buyer traffic reducing competition, homebuyers who want to purchase a new home can look forward to incentives builders are offering, according to The Wall Street Journal. Due to weak sales and higher prices, builders believe the perks will attract more consumers. These incentives include financial assistance for closing costs, as well as premium upgrades for amenities.

“Incentives have increased because builders aren’t selling as well as they would like,” John Burns, chief executive of housing research firm John Burns Real Estate Consulting Inc., told the Journal. “Some of the communities pushed prices too far. Rather than reducing prices (outright), they use incentives.”

Not only are market conditions encouraging builders to offer more incentives, but developers are also trying to compete with the incentives offered by other builders. Stuart Miller, CEO of Lennar Corp., a home building company, told the source his organization recognizes the trend but is taking a more calculated approach.

“In place of increasing incentives across the board, we strategically used them on specific communities where we thought the sales pace was a little slow,” Miller said.