Fitch: When It Comes to US Housing Inventory, More Is Better
OREANDA-NEWS. The US housing market has been recovering for four years and the expansion has been more moderate than in the past for a variety of reasons, according to Fitch Ratings. One important issue that has restrained sales and starts is inventory. On an absolute basis, inventory has not expanded as much as in past recoveries, leading to less selection for buyers. This is especially true for existing home sales but is evident for new home construction as well.
The December 2015 existing home inventory of 1.79 million (3.9 months of sales) was down 12.3% compared with November 2015 and was off 3.8% compared with December 2014 and down 3.8% versus December 2013. July 2007 had a peak of existing home inventory of 4.04 million. New home inventory as of December 2015 was 237,000 homes (5.2 months) compared with 231,000 (up 2.6%) at November 2015, 217,000 (up 11.8%) at December 2014 and 187,000 (up 26.7%) at December 2013. The peak new home inventory was 572,000 (7.3 months) in July 2006.
Fitch believes part of the issue that has dominated the recovery so far is the limited supply of better located lots suitable for the trade-up market. In general, broad lot development has lagged as many land developers left the industry during the downturn and those remaining were cautious or financially constrained in their subsequent development activities. More recently, additional capital has been committed to land development, but the sector is still playing catch-up.
Current homeowners who may want to buy another existing home or newly built home often put off purchase due to limited selection. Also, first-time homebuyers find there are limited affordable new-home inventory options because builders have been largely concentrating on constructing trade-up housing and aggressively raising prices.
A supply shortage also affects home prices. National home price inflation has narrowed during the past two years but not as much if inventories were deeper, which is especially the case in California and other coastal markets. The national Case-Shiller Home Price Index expanded 9.6% in 2013, 6.6% in 2014 and 5.3% in November 2015 (versus November 2014).
Looking to 2016, at least a few public builders are opening or planning to open subdivisions in outlying communities and offering more affordable housing targeted to first-time buyers, including MDC, Meritage Homes and, especially, D.R. Horton. However, we do not see indications that meaningfully higher industry inventory, new or existing, will be available this year than was the case in 2015. Incidentally, public builders do have sufficient land under control to support considerably greater product offerings.
Fitch projects that new home sales prices (as measured by the Census Bureau) will rise 2.0%-2.5% in 2016 as somewhat lesser sales gains in high-price coastal markets and some increase in the share of total new home sales to entry-level/first-time homebuyers counters the effect of limited inventory.