Row of large old brick houses with front porches and gardens
Buying, Finance, New Home Construction

Home Inventory Outlook for 2020: New Builds are on the Rise

For first-time homebuyers, new builds might be the way to go. The inventory of existing houses for sale is at an all-time low, but more new homes will be built this year than at anytime in the decade. Here’s a housing inventories outlook for 2020.

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Anyone house hunting for at least the next six months or so might want to concentrate their search in the new home market during the beginning of their search. For one thing, the inventory of existing houses for sale is at an all-time low, so competition for anything worthwhile that comes to market will be fierce.  But for another, more new homes will be built this year than at anytime in the decade and they’re becoming a bit more affordable, too.

Existing Home Inventories are Declining, New Home Inventories are Inclining

In fact, not withstanding an occasional blip here and there, the number of houses on the market has been declining steadily for nearly four years. In December, it fell to an all-time low, with about 120,000 fewer houses for sale nationally than there were in 2018. If you look locally, the situation is even worse. Only four of the nation’s 50 largest markets had more houses for sale in December than 12 months earlier. The rest saw their inventories decline, 29 by more than 10%.
On the flip side, though, the nation’s home builders are looking forward to a good year, both literally and figuratively.
Builder confidence, a pretty good gauge of how their businesses are doing, is the highest it has been since July 1999, according to the National Association of Home Builders. “The need for additional inventory is setting the stage for further home building gains in 2020,” the group’s Chief Economist, Robert Dietz, said at NAHB’s annual conference in Las Vegas in January.
Noting that the new home market is “entering the year with momentum left over from 2019,” Frank Nothaft, Dietz’s counterpart at data analytics company CoreLogic, told the conference that 2020 is “shaping up as a pretty good year.”
Row of large old brick houses with front porches and gardens
The NAHB predicted that builders will put shovels in the ground for 1.3 million units this year, up 2% from 2019, with single-family houses accounting for 920,000 of those starts. In 2021, it expects 925,000 more detached house to rise from the ground.
Dietz said the low resale inventory, favorable mortgage rates, low unemployment and accelerating wage growth are all working to keep demand firm. Nothaft at CoreLogic noted that unemployment and interest rates are below 4% for the first time ever. David Berson, the Chief Economist at Nationwide Insurance, said, “Loan costs are likely to remain low for a long time. Not necessarily as low as they are now, but under 4% and given the historically low number of homes for sale relative to the number of households, there is only one outlet to meet demand – new home construction.”
In another press briefing, meanwhile, Rose Quint of the NAHB’s research section, said most signs point to builders trying to satisfy the needs of entry-level buyers and those who are moving up from starter home for the first time.

Demand for Smaller Homes are on the Rise

Not only has the size of new homes fallen for four consecutive years– to an average of 2,520 square feet, the smallest since 2011– the number of homes with three or more bedrooms, three-plus bathrooms and three-car garages are down. “Builders are working to meet the demand for smaller homes,” Quint told reporters. “The average new home is now only 20 square feet larger than in 2007.” None of this is to say that all is well in the building business, because it’s not.
For one thing, builders have a lot of ground to make up. “It’s been a long recovery from the 2008 Great Recession,” Dietz said. In the aughts, as the decade between 2000 and 2010 is known, some 12.3 million new homes were started. But in the 2010s, just 6.8 million were built. In other words, new construction has not kept pace with demand. Lawrence Yun, Chief Economist at the National Association of Realtors says, “We are still not seeing the amount of construction needed to solve the housing shortage.”
There are reasons for that, of course. They’re called the Five Ls:
  • Lending: Builders need access to financing to buy land, develop it into lots and construct their house. But ADC (Acquisition, Development and Construction) financing has been tight. Though access has improved a bit of late, money is still sometimes hard to come by, especially for small and regional outfits.
  • Laws: Regulations that cover zoning, lot sizes, parking requirements, street widths and other factors account for 24% of the price of a typical house, the NAHB claims. And between 2011 and 2016, such costs increases at a faster clip than either inflation or economic growth.
  • Labor: The 2008 recession had a huge impact on the construction sector, as workers who couldn’t find jobs left for greener pastures and never returned. Today, the NAHB counts 311,000 unfilled construction jobs. Consequently, new homes probably won’t be finished on time and are likely to have a few more cosmetic defects.
  • Lots: Builders need finished sites to perform their magic. But by historical standards, these lots are scarce, if available at all. The NAHB says 58% of its members said the supply of buildable lots in their markets was low or very low.
  • Lumber: The cost of lumber and other building materials fluctuates widely, and that acts as another headwind. Sometimes they’re up, sometimes they’re down. This one goes, that one comes down. All making it tough to run a business.
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Lew Sichelman
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Syndicated newspaper columnist, Lew Sichelman has been covering the housing market and all it entails for more than 50 years. He is an award-winning journalist who worked at two major Washington, D.C. newspapers and is a past president of the National Association of Real Estate Editors.

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