Builder's Market in The United States
News headlines have highlighted that it's one of the strongest seller's markets we have ever seen for Builder's Market. But is it? 2021 was a year for the real estate record books. Across the country, homes were flying off the market, with the average listing time dropping to 53.5 days, down by 16% from 2020. As a result, listing prices across most major residential real estate markets have skyrocketed. According to the Zillow Home Value Index, home values rose an average of 19.6%, a record-high pace of appreciation. The average home value has now reached $320,662. So, what's driving such incredible price growth?
What we are seeing is an outrageous imbalance between supply and demand. Buyers are out in hoards, and sellers are holding tight onto their properties. In fact, inventory on the market is down 40% from pre-pandemic levels.
So yes, it's a seller's market. But even more so, we are in the middle of a builder’s market. Why? Because the housing shortage doesn't end with the number of homes listed for sale, this is just the beginning of what is essentially a supply chain issue.
Builder's Market and Low interest rates.
With interest rates so low and a rise in consumer savings, there are now more buyers in the market than ever. Harvard’s America’s Rental Housing 2022 report stated that we are currently in the midst of the least affordable market in 13 years. There is a massive shortage of affordable rental units and homes for sale.
Inflation Brings Investors to the Residential Real Estate Market.
Inflation in 2021 was at a 31 year high, reaching over 7%. The result of rising inflation is that prices are driven even higher. Why? It’s a simple economic correlation. When
when inflation goes up, housing prices also tend to follow the same trend.
Savvy investors following this trend are jumping into the real estate market. With the current volatility in the stock market, they know that investing in real estate is an ideal hedge against inflation.
So, with more investors in the market, there is even more competition for homebuyers. In some of the country's more robust markets, homes are getting between 15 and 20 offers.
For those looking to grow their wealth and protect against inflation, real estate investing is one of the best and most practical asset classes.
The only solution is new construction.
Over the past two decades, new home construction has not kept pace with the number of homes required to meet growing demand. On average, 947,500 homes were built each year when in fact, the country needed approximately 1,300,000 new homes. This is the core cause of the housing crisis. According to the National Association of Realtors (NAR), the United States is 6.5 million homes short of a balance between supply in demand.
What does this mean? For the market to keep pace with growing demand, new households, and decades of insufficient supply, the country needs 2.5 million new homes must be built each year for the next ten years to fill the gap.
Contractors and major builders are crucial to solving this problem, but they are in no rush. With the pandemic, both labor and raw material costs have risen significantly. The result is that builders' profit margins get pinched, so they greatly benefit from increasing home prices. For new construction to remain profitable, home prices need to be significantly higher than the cost it takes to build them.
Builders are already well aware of what happens when too much supply is in the market. While average construction levels over the past 20 years haven't kept pace with demand, there was a period of oversupply. Before the Great Recession, many builders found themselves with an abundance of stock that they couldn't sell. As a result, new homes sat empty, and developments were left unfinished. Developers and banks whose business survived this period are now scarred and understandably warry of overbuilding in their markets.
In this historic real estate market, sellers have a significant upper hand, but when it comes down to solving the housing shortage, the power is in the hands of home builders. With strong demand from homebuyers and investors, market conditions are prime for new construction. Let's hope it stays this way so contractor’s confidence continues to increase and more new homes enter the market.