In recent months, economists have blamed a tight inventory of homes on the market for muted gains in sales and for holding back a more robust housing recovery. But according to new data, the housing market could now be eliminating that drag on a turnaround.
A few years ago, rising inventories and falling prices were obvious signs of waning demand as the housing boom wound down. Builders cut production and the volume of existing-home sales fell. Over time, the excess inventory was sold off, helped by population growth in spite of weak demand.
In the wake of the bust, home building did not bounce back as quickly as in past recessions, due in part to a lack of lending. This resulted in fewer new homes being built, further shrinking the inventory of new homes for sale – especially as the number of foreclosures slowed.
But according to Census data, the inventory of newly built homes – which includes homes under construction and completed, ready to occupy units – is rising again as housing demand picks up. After hitting bottom in July 2012 at 142,000, the total inventory of new homes for sale is up almost 10 percent to 156,000.
(Source: Census Bureau)
However, as a sign that supply is having trouble keeping up with demand, the inventory of just completed, ready to occupy new homes has continued to decline as home buying demand has ramped up. With only 39,000 completed new homes in the housing inventory as of April 2013, this marks the lowest level of ready-to-occupy new construction on record.
On the existing-home side, the number of homes for sale are rising too, as home price increases bring more homeowners into positive equity territory and as a result, more willing to sell. As of April, inventories of existing homes are up 22 percent from cycle lows set in January, rising to 2.16 million units according to the National Association of Realtors.
But much of these gains are seasonal and year-over-year figures still show a steep drop – about 14 percent – in the stock of existing-homes for sale. Only time will tell if more homeowners will test the market as rising prices release pent-up supply and demand, but the data suggest that on a seasonally adjusted basis, existing home inventory is rising to meet growing demand.
Another good way to see housing inventory gains is by comparing the "months-supply" measures for the new and existing home markets. The so-called months-supply is the number of months required to sell the current inventory of homes at the current rate of home sales.
(Source: Census Bureau)
The pattern of months-supply for new and existing homes is relatively the same. As of April, the months-supply of the existing housing market stood at 5.2, up somewhat from a cycle low of 4.3 set in January 2013. For new homes, months-supply came in at 4.1, up slightly from the low of 3.9 also set in January.
These data indicate that increases in new home inventory, and perhaps gains in the existing home for-sale stock, are part of the recovery process and represent good news. But there are concerns. If the withdrawal of investor-buyers is not replaced by traditional home buyers, particularly first-time home buyers, the months-supply measures could again rise, which would hurt the price gains witnessed since 2012.
Robert Dietz is an economist with the National Association of Home Builders (NAHB). Previously an economist with the Congressional Joint Committee on Taxation, Robert writes on housing and policy issues at NAHB's economics blog Eye on Housing. Follow Robert on Twitter at @dietz_econ. The information presented here does not necessarily represent the views of NAHB or its membership.