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Are Home Builders Moving Too Fast?

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To many homes

Are Home Builders Moving Too Fast? - Increases in home sales and home prices in recent months have boosted builder confidence in the housing market, and in turn, have led to more homes being built. However, the pace of new home construction is now ahead of the pace of home sales. That could create problems in the months to come – especially at a time when the real estate industry is beginning to shows signs of recovery.

There’s good news and bad news here, so let’s start with the good news.

The real estate industry has been one of the strongest sectors of the U.S. economy in recent months. It has led to a boost in consumer confidence among prospective homebuyers, particularly among those looking to buy or build a new home. As a result, new home prices have gone up! The nationwide median sales price of a new home in December climbed 1.3% to $248,900. For all of 2012, the median sales price was $243,600. That’s 7% higher than it was in 2011 – making 2012 the best year for new home sales since 2009.

Builders took notice of this trend, and they started building more homes at the end of 2012. At first, it was hard to tell if their efforts were paying off. After all, Hurricane Sandy slowed construction down in many states throughout the Mid-Atlantic and Upper East Coast regions, so October sales numbers were down. That led to higher-than-expected sales in November 2012. In fact, according to the U.S. Census Bureau, November saw a revised annual rate of 398,000 new home sales nationwide.

But the number of new homes sold leveled back off in December. Statistically, new home sales were down 7.3% from the month before, but economists said those figures could be misleading. Even with the 7.3% decrease from November, December's annual rate of 369,000 home sales was still 8.8% above where it was the year before. So, if home sales were up in 2012, why is there concern among economists about too many homes being built?

That brings us to the bad news in this equation.

Simply put, builders may be constructing homes too quickly, meaning that they may eventually create too much supply for the demand. According to personal finance and business banking firm Comerica, completion of single-family housing units were up 16.3% in December when compared to the year before. So, new home completions are up 16.3%, but new home sales are only up 8.8%. That means there are twice as many new homes being built as there are being sold. If that gap increases in the months to come, the market could be flooded with unwanted and unpurchased new homes.

That has some experts worried, like Comerica chief economist Robert A. Dye, who recently told the Sarasota (Fla.) Herald-Tribune, “There is a disconnect between construction data and sales data that suggests that builders may be getting a little ahead of themselves at a time when households are feeling a headwind from fiscal tightening.”

What has experts even more concerned is that the new home sales numbers for December were slightly lower than many analysts had projected. Economist had forecasted an annual rate of 385,000 new home sales nationwide for December. That figure was 16,000 sales higher than the actual sales data.   

So, what does all of this mean?

It's too soon to panic right now, but builders, consumers, and economists need to keep watch on market trends in the months to come. The statistics are showing that overall new home construction completions are up, and so are sales. Nothing is at an alarming rate just yet.

However, if builders continue to start and finish homes at the current rate – and the sales figures do not increase – we could have a housing market that is flooded with too many available homes. That would cause prices and home values to drop. But, of course, only time will tell if that actually happens.  
 


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