In 163 of the 175 metro areas surveyed by the National Association of Realtors, the price of homes has been rising in both the new and existing homes categories. The data certainly foreshadows a hotter market for the construction industry. However, higher prices can pose a few problems.
The housing sector has been down for a long time, and most home builders have gone into survival mode to some degree. They do not have the inventory similar to that of the past, and this shortage is part of what has been driving prices up. Coupled with higher demand, the homebuyer is now facing a higher cost for the home of their choice.
This is a critical point as far as the sector is concerned. If the demand appears sustainable, the builders will choose to start trying to catch up; but if this demand is only temporary, there will be less enthusiasm for building up inventories. Much of the direction seems to come down to what one thinks the Millennial buyer will do.
The evidence is that those at the older end of the Millennial generation spectrum—people in their early 30s—are getting interested in buying homes at a more consistent pace. However, those in their 20s don’t appear to be budging. If the builders assume that demand is returning and that cohort still sticks to the multi-family option, they will be left with stock they can’t sell. That could trigger another debacle like the one in 2008-2009. Opting for caution and a wait-to-see what these people do approach, there will be shortages and higher prices that will discourage the very people the home builders are so eager to see in the market.
- Chris Kuehl, Ph.D., NACM economists and Armada Corporate Intelligence co-founder