If They Don't Build Homes, You Can't Sell Them

Residential sales levels are constrained by a lack of new inventory.

Home sales have been volatile on a month-to-month basis, but on average they’re almost exactly where they were last year: at an annual sales pace of about 5.2 million units. Closing rules that took effect in October likely played a role in the inconsistency, as did abnormal winter weather trends.


Notwithstanding the ups and downs of the transaction pace, there appears to be a steady stream of buyers in the market, so we can expect sales to hold steady this year and settle at a pace close to where they were at the end of 2015.


The chief constraint continues to be inventory levels, which remain historically low. There were only 2 million homes available for sale nationwide at the end of March. That’s just a 4.5-month supply at today’s sales pace. Additional inventory will spur more transactions and moderate home-price growth.


The latest annual home-price growth of 5.7 percent is unsustainable because incomes are rising by only 2 percent per year. Either demand will have to fall or supply will have to increase to align price and income. Many potential first-time buyers are telling us they are less likely to buy now, since prices are moving beyond the affordable range. That is why first-time buyers currently account for just 30 percent of the market, compared with the more typical 40 percent.


Given that affordability is a major factor in home buying, the best way to improve the market is to bring in additional supply. Builders should be all over this. Sales data indicate they are selling everything they build within three months on average, so why aren’t they building more? If inventory levels were higher, overall home sales could easily rise by another 15 percent from current levels.


Let’s hope whatever is holding builders back—whether it’s the availability of construction financing, local zoning regulations, or the availability of skilled construction workers—can be addressed soon, because only when builders ramp up production can we hope for a sales expansion with staying power.