On June 3, 2021, KB Home’s residential single-family house was under construction in the Valley Center community in California.
Mike Black | Reuters
Those who go out to find a house now know that there are few choices, fierce competition, and high prices, but an analyst claims that there are actually too many houses being built.
According to data from the National Association of Realtors, the total supply of houses for sale at the end of August was 1.29 million, a decrease of 1.5% from July and a decrease of 13.4% from August 2020. At the current sales rate, this represents 2.6 months of supply, which is one of the lowest on record. The 6-month supply is considered a balanced market between buyers and sellers.
However, an analyst with Dennis McGill, head of research at Zelman & Associates, believes that the current supply of houses for sale does not represent the overall demand for more houses to be built. He believes that due to the unusual surge in sentiment triggered by the pandemic, demand is currently strong. Historically, demographic data that better gauged housing demand did not support more construction.
McGill said: “Population growth and family formation are on a downward trend, which will indeed undermine the demand for the buildings built.” “On the other hand, your development community is actually very optimistic about the housing shortage, and is actually very optimistic about what needs to be built. The numbers are very optimistic. They actually stepped on the accelerator harder than we thought.”
McGill believes that population demand is on a downward trend. He cited data from the U.S. Census of the latest ten-year census, which showed that the family formation rate was about 24% lower than that of the previous four years.
McGill partner Ivy Zelman may be known for one of the first warnings about the subprime mortgage crisis more than a decade ago, and he agrees.
“The market is too hot. Only a lot of money is pouring into this area,” Zellman said of investors’ interest in the real estate market. “We actually believe that the industry has over-built about 20% of the normalized demand in single-family houses, while the demand for multi-family houses has increased by about 10%, so we cannot stand on the opposite side of the market and the industry. ,frankly speaking.”
However, the home builders seem to disagree. The number of new housing starts has not yet reached the level of more than a decade ago, but it is slowly picking up, and housing builders are in high spirits. The country’s public housing builders’ inventories have also been declining, although this is mainly due to pandemic demand.
“I have read Ivy’s arguments and I do agree that population growth is slowing down, which is why the old normal (a combination of 1.8 million single-family and multi-family buildings starting at 1.8 million units a year) was too high,” said Chief Economist Robert Ditz. National Association of Home Builders.
Soft shell sticker
But Dietz disagrees that the industry is overbuilding.
He added: “We need 800,000 to 900,000 single-family houses for family growth, and another 200,000 to 300,000 per year for replacement housing and second housing.”
Dietz pointed out that 2018 is a more guiding year for real real estate market conditions. That was the last period of rising mortgage interest rates, and it did produce what he called a soft housing patch.
“The challenge now is that we have supply constraints, including a lack of construction materials and an increasing shortage of skilled workers, coupled with higher housing prices relative to income,” Dietz said.
If the market has actually been over-built, it will bring greater problems to housing prices, and housing prices are definitely overheating. Most people expect that as interest rates rise, price increases will shrink, but if there is an oversupply of houses for sale in the next ten years, prices may fall even more.
A real uncertainty is the very hot single-family rental market, which is being driven by new investor demand. If rental demand drops and these investors decide to sell and cash out, the supply will definitely exceed the demand, and the tight and expensive market we are seeing now will be exactly the opposite.
“You have a house builder that provides supply, you now have a single-family rental company that provides a large amount of supply, built for rent, and you have multi-family developers to bring supply, so these three parts have seen a very big improvement. Optimism on the development side is rising and it will take some time to enter the market,” McGill said. “But it will come very positively.”
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