Homebuilders were one of the big surprise winners in the US economy last year as record-low inventory of existing houses for sale and gently rising prices allowed companies such as KB Home and Lennar Corp. to ramp up construction and maintain high profit margins. Both have said they expect more of the same in 2024 — they may be in for another surprise.
There’s growing evidence that we’re about to see the most significant increase in resale housing inventory since the financial crisis of 2008, making the prospect for price gains this year tenuous. The question for homebuilders is whether a sharp rise in the number of existing homes for sale does the damage that was expected from sharply higher mortgage rates, hurting profitability, and necessitating a strategic pivot. Any pullback has longer-term implications for a market where new construction is seen as an important antidote to a lack of affordability.
The backdrop for the housing market since the financial crisis has been one of ever-dwindling levels of resale inventory, which declined just about every year following a peak in July 2007.
It took homebuilders years to work through their balance sheet problems post-2008 and for prices to recover enough to make building profitable again. The increasing shortage of resale inventory then fueled demand for newly constructed homes and gave companies the confidence to invest in projects without fear of overbuilding and negatively impacting prices. As a result, new home inventory levels are now back to the highest since early 2008, triple what they were at the bottom in July 2012.
That’s what makes the current moment — and how things might unfold over the next six months — so consequential. Resale inventory levels are still very low, but they’re now up meaningfully from early 2022. The National Association of Realtors reported a 10.3% rise in February from a year earlier. Altos Research estimates a 23.9% year-over-year increase as of March 22, based on real-time weekly data, and founder Mike Simonsen predicts that growth could peak at 40% later this year.
If Simonsen is right, homebuyers could get some much-needed relief after the frustration of watching mortgage rates climb while their housing options narrowed. America will still have an overall housing deficit of somewhere between two million and six million homes, depending on the source, but prices are set on the margin. It took a historic inventory shortage to cause a historic affordability problem, so a somewhat less acute inventory shortage should chip away at prices, particularly if mortgage rates remain onerous.
There are already indications of this in the weekly data from both Altos and real estate brokerage Redfin Corp, with the percentage of listings taking price cuts at elevated levels for this time of the year. I’m skeptical about how much home prices can fall — we still have buyers who’d really like to find and own homes, and sellers who don’t have to sell for economic reasons — but supply is currently rising faster than demand, and that should put downward pressure on prices.
Homebuilders haven’t operated in an environment of rising resale inventories in almost a generation. For the moment, they don’t seem concerned. Major publicly listed builders Lennar and KB Home forecast rising profit margins when they reported earnings recently. Even if resale supply improves, they will have some levers to pull: well-documented mortgage-rate buydowns, building smaller and cheaper homes, and shifting production away from the hotspots of the 2010s. It’s also possible that mortgage rates begin to ease, giving the whole market a fresh boost.
Still, an environment of rising resale inventories and softening prices isn’t bullish for homebuilders. And they may well be forced to choose between accepting lower profit margins to sell homes or curtailing production to do their part to keep inventory scarce.
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