Even though more listings are hitting the market as the prime summer selling season kicks in, an overall shortage of homes for sale remains the primary market driver pushing home values up.
On the whole, the market struggled to meet demand in May. The volume of real estate sold across all Front Range markets in May increased 1.0% compared to May 2015, and was up 16.6% over April 2016. The supply of available inventory dropped slightly to 1.5 months.
What could alleviate this inventory shortage? Historically, a typical market response has been the construction of new homes. Newly constructed homes increase the housing stock and provide a move-in ready product for home buyers hungry for new listings.
Unfortunately, new construction may not come to the rescue as it has in the past. Although new home starts are increasing, they are still well below the level needed to keep pace. Housing starts are running at an annualized rate of about 780,000 units this year, nowhere near the historical norm of 1.2 million units per year. According to Zillow’s Chief Economist Svenja Gudell, “New construction has been sluggish over the past year; we’re building about half as many new homes as we should be in a normal market.”
As a result, everything the builders are building is being snapped up. A few weeks ago, the Commerce Department reported that sales of new homes hit an eight-year high, with many homes pre-selling before ground is even broken.
The builders are struggling to keep up for a few reasons. The primary impediment is that there is simply less and less developable land available for new home communities. For land that can be developed, the process to entitle and permit has become more complicated and is taking longer, as municipalities and counties adopt tighter land use controls and policies.
Furthermore, even when a builder obtains the green light to build, the location will most likely be out on the perimeter where developable land is available. As a result, new communities may not have much of an impact on markets with the worst inventory shortages, often found in older, mature neighborhoods closer to the urban core. They may not consider new communities that require a daily work commute or a trip in the car for shopping.
So, although new homes offer some buyers an alternative to waiting for the right resale listing to come along, new construction alone is not going to solve the market’s inventory shortages. That said, any new listings, whether new or resale, can only help when so many ready, willing and able buyers are having a hard time completing their home purchase.
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