Supply Constraints Could Slow the Home Market

March 25, 2021
625 Views

Low inventory has been a constant in the home market for more than a year. The supply of existing and newly built homes has been limited, which has contributed to high competition and inflated prices.

The latest data shows that both existing home sales and new home sales declined last month. This is big news for the economy and anyone who is thinking about buying or selling. Here are the most important takeaways from the latest developments.

New Home Sales Slowed in February

There are supply constraints in the new home market, which could create more competition, inflate prices, and leave some potential buyers unable to find a deal.

In February, the sale of new homes fell more than expected, declining 18% sequentially. This has slowed the new home market to a similar pace as May 2020. Builders face higher costs and ongoing delays with limited availability of affordable materials and labor.

There’s a worrying statistic to be found here. Homes sold before construction or completion increased 20% year-over-year in February. This shows that the inventory just isn’t there for buyers, and there will be a limit to how many buyers are willing to close deals on homes that don’t yet exist.

Despite this data, many in the industry are optimistic about recovery later in the year. Some believe that the slowdown is weather-related, and that new home sales will remain above pre-pandemic levels, with the spring and summer likely to be a boon for homebuilders.

The very fact that builders are willing to sell unfinished projects suggests that they are confident about growing demand.

Existing Home Sales Also Slowed

In February, existing home sales were down 6.6% sequentially, but the market is still performing better than in 2020. It is roughly 9.1% ahead of where it was this time last year.

However, existing home inventory is also low. The supply fell by 29.5% year-over-year in February, with just 1.03 million existing homes available on the market.

The Risk of Low Supply

Low supply could price people out of the market. As prices increase, buyers who were waiting for opportunities will no longer be able to close mortgages. Lending rates are increasing, which compounds the problem.

Ready buyers are advised to engage with the market as soon as possible because today’s low-rate environment and relatively low home prices aren’t likely to last for long.

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