Who’s responsible for the inventory shortage?

Does the blame lay with owners of existing homes are aren’t motivated enough to sell or with builders who simply building enough to meet demand?

As the days count down to the opening of the spring sales season, inventories are lagging behind last year—which lagged behind 2014.  The result has been upward pressure on prices, multi-bid situations and disappointed buyers who cannot find the home they want.

The tension is showing—especially between the nation’s top housing associations who are raising alarms and pointing fingers.   Over the past two weeks, the top economists from the two national trade associations represent builders and Realtors have gone public with heated rhetoric that underscores the seriousness of the situation.

In an interview with Housing Wire March 10-just eight days before his scheduled retirement- David Crowe, chief economist of the National Association of Home Builders, said the real problem lies with the existing home market.  The move-up buyers who are the primary market for new homes are not moving up.  If they would get off the dime, they’d find a nice selection of new homes to choose from.

“I do not believe there is a shortage of new housing inventory. There is a shortage of existing housing on the market, and that is the trickle effect. If there is a shortage of existing homes, that is where brand new homebuyers come from—selling existing homes. If the existing homeowners are unwilling to sell for a variety of reasons, then they are not released to buy the new homes. The new home market is waiting on existing homeowners selling their current home to build more new homes,” Crowe said.

“It is a domino effect—some existing homeowners cannot sell because they do not have enough equity in their home to come out with a sufficient down payment. Some of them no longer have the credit rating to get a mortgage. So there are some other reasons. However, those that are just plain reluctant are often reluctant because they realize that if they want to buy an existing home, their options are relatively narrow. So it is feeding on that reluctance that is continuing to keep the inventory low,” Crowe said.

Many sellers may not have an absolute decision as to whether to buy an existing home or a new home. So the low inventory of existing homes is locking them in place, even though if they were to decide they wanted a new home, they probably would have a greater opportunity or greater selection from the inventory of new homes, he told Housing Wire.

Five days later Lawrence Yun, Crowe’s counterpart at the National Association of Realtors countered with a survey showing most renters would love to buy a single-family home in the suburbs if they could find one.

According to Yun, it is time for homebuilders to double their focus on constructing single-family homes. With millennials increasingly buying in the suburbs, tight inventory and affordability concerns will likely worsen without significant headways made in housing starts about job creation, he said.

“The American Dream for most consumers is not a cramped, 500-square-foot condo in the middle of the city, but instead a larger home within proximity to the jobs and entertainment an urban area provides. While this is not a discovery, supply and demand imbalances and unhealthy levels of price growth in several metro areas have made buying an affordable home an onerous task for far too many first-time buyers and middle-class families,” said

While both the existing and new home economies may share responsibility for the growing inventory crisis, the debate will probably do little to get more new homes built.

America’s home building industry was decimated by the housing crash.  Thousands of smaller builders closed down and many of those who survived did so by selling off their inventories of prime real estate earmarked for future construction.  In an article in Builder magazine last October, Crowe wrote that from 2008 to 2013, few builders reported an improvement in access to any form of credit.

Now home builders face a labor shortage, he wrote. The drop in residential construction (and a similar fall in commercial construction) induced many construction workers to find jobs in other industries. Since 2009, the fall in unemployment for those formerly in construction meant more than 1 million workers found a job or left the workforce. However, the construction industry gained only one-half million workers, meaning half of those former construction workers found jobs in another industry or left the workforce entirely. The loss of experienced workers is aggravated by relatively few young workers entering construction trades. So, even if lots are available, finding trained, available workers has slowed home building’s revival, Crow said.

Even with these two significant input hurdles, builders have increased the new-home inventory by 50%. For-sale inventory dipped to a record low of 143,000 in mid-2012, but has slowly revived to 216,000 by mid-2015. The share of for-sale homes that are complete and ready to occupy has dipped to one-fifth of the new homes for sale as builders struggle to add inventory in the face of the supply chain bottlenecks and at the same time keep inventory close to the current sales pace.

One thing both Yun and Crowe agree on is the situation is serious and new home production will take three more years to ramp ups.  “There were only 1.82 million existing homes on the market and 235,000 new homes for sale at the end of January. That corresponds to a four months’ supply, just not enough when compared to historical norm,” wrote Yun in a Forbes article last month.

“The best guess is that we’ll see around 570,000 new homes sales in 2016, which would represent a 15% gain from last year and the best showing for new home sales since 2007. Another 15% to 20% jump is likely in 2017 to bring the new home sales tally closer to 700,000. Let’s not forget that even with these sizable increases, the market will not reach the more normal 1 million mark until around 2020,” said Yun.