Why aren’t there more new homes for sale?

In a country of more than 335 million people, with 157 million of those people working, we still only have 76,000 new homes available for sale as we head into December.

The crazy part of this story is that this number looks perfectly normal to me. One of the urban myths spouted by people needing more experience tracking housing data was that millions of homes would hit the marketplace in 2023 because the builders had so many homes under construction. If you ever wanted to flip out your rookie card to the public, you were pushing this.

For some context, this data line is never that big. Even in the worst housing bubble crash of our lifetime in 2008, the number of new homes for sale was under 200,000. This shows that some people don’t bother reading. Be the detective, not the troll, folks. On to the report.

From Census:

New Home Sales: Sales of new single‐family houses in October 2023 were at a seasonally adjusted annual rate of 679,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 5.6 percent (±12.3 percent)* below the revised September rate of 719,000 but is 17.7 percent (±17.9 percent)* above the October 2022 estimate of 577,000.

New home sales missed estimates and had negative revisions for three months, but the number is still growing double-digit year over year — even with mortgage rates at 8% in October. Of course, mortgage rates have fallen recently, leading to purchase application data growth in the last three weeks and this week could be the first time in a while since we see four weeks straight of purchase application data growth.

For sale inventory and months’ supply: The seasonally-adjusted estimate of new houses for sale at the end of October was 439,000. This represents a supply of 7.8 months at the current sales rate.

Here’s my model for understanding the builders:

When supply is 4.3 months and below, this is an excellent market for builders.

When supply is 4.4-6.4 months, this is just an OK market for builders. They will build as long as new home sales are growing.

When supply is over 6.5 months, the builders will pause construction. 

So, 7.8 months is too high in my view to start having a housing construction boom in single-family homes. However, single-family permits have been growing since builders have been able to provide lower mortgage rates for their buyers. With mortgage rates falling recently, we might see a pick-up in builders’ confidence, which has been falling in recent months.

One of the things I like to do is break down the monthly supply data into subcategories. We have a lot of homes in the pipeline that still need to get built; this is why the builders are making deals. As we see in the monthly supply data, they had a spike last year and are forced to create incentives to move homes. Here’s how the supply breaks down:

1.3 months of the supply are homes completed and ready for sale — about 76,000 homes.

4.5 months of the supply are homes that are still under construction — about 257,000 homes

1.9  months of the supply are homes that haven’t been started yet — about 106,000 homes

The new home sales market grows yearly as builders offer lower mortgage rates and cut prices to move product. But they have done so in an efficient way to keep their business model going in a positive direction. This explains why the big publicly traded builders’ stocks have done much better than anyone imagined they would.

The builders have 106,000 homes they haven’t even started building yet, which is an all-time high, and they’re managing their supply so when those homes are finished they have buyers ready to buy and move in. Why aren’t there more new homes for sale? Because the builders are efficient sellers. They’re not a charity — they’re here to make money.

Even though the new home sales missed estimates, the builders are still growing sales in 2023 leveraging their ability to offer lower rates. Just imagine if the existing home sales market could access sub-6% mortgage rates now: sales of existing homes would have been growing as well. 

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