Rising Inventory Amidst Affordability Challenges

Recent observations indicate a notable increase in the inventory of existing homes for sale, despite ongoing affordability difficulties facing potential buyers. Ivy Zelman highlights that in certain regions, particularly Florida and Texas, home inventory has surged by approximately 50% compared to levels prior to the COVID-19 pandemic.

Surprising Market Resilience

Logan Mohtashami pointed out that, although mortgage rates have largely remained above 6.65% this year, there has been unexpected strength in purchase applications and pending home sales. Mohtashami expressed surprise at the positive trend in purchase application data year over year, stating, “If someone told me rates would stay this high and we’d have positive purchase application data year over year…I would have not taken that bet.”

Challenges for Builders

While builders previously enjoyed an advantage due to constrained resale inventory, the panel noted a shift in this dynamic. According to Zelman, the gross margins for many builders have dwindled to below 20%, which may limit their ability to subsidize mortgage rates for buyers.

Dale Wettlaufer emphasized the impact of rising land and development costs, which are now surfacing in builder financial statements. He explained, “Today’s COGS for long lead-time builders reflect development costs from four years ago.”

Market Dynamics and Consumer Confidence

Current market trends show that consumer confidence poses an increasing risk factor, potentially overshadowing mortgage rate concerns. Builders may consider slowing new housing starts and renegotiating their land purchase options as a strategic response to changing conditions. Furthermore, without significant adjustments at the local policy level, the constraints on affordability seem unlikely to ease in the near future.

Zelman succinctly stated the core issue, noting, “We have a shortage of affordable homes — not a shortage of homes, period.”

Conclusion

The U.S. housing market is currently at a crossroads, with rising inventory levels juxtaposed against persistent affordability challenges. As economic conditions evolve, the behavior of both consumers and builders will play a pivotal role in shaping the future landscape of housing.