In most parts of the country, a new home is hard to find. "The inventory of unsold new homes is at its lowest level in history," said David Crowe, chief economist for the National Association of Home Builders (NAHB). During the first two months of 2011, only an estimated 150,000 new homes were for sale nationwide, according to census data. In a "normal" economic recovery, this would be the moment when new-home construction surges. The U.S. population is still growing and those people need places to live. Usually, developers hire construction workers to build those homes, creating new jobs and solid economic growth. New-home construction has led the way in every economic recovery since World War II, according to the economists at Freddie Mac. However, things are different this time around.
ForeclosuresToday, the millions of mortgages still at risk of foreclosure have put continued downward pressure on home prices, prompting many potential borrowers to put off buying a home until prices begin to rebound. The unfortunate result of the lack of sales is that workers aren't hired to build, housing demand declines and the recovery of the housing market and overall economy is stalled.
Pent up demandThe good news is that the U.S. population continues to grow, creating pent-up demand for new housing units that will eventually have to be built.
"We are not creating new homes to accommodate our growing population," said Nic Retsinas, senior lecturer in real estate at the Harvard Business School. Normally, according to Retsinas, 1.1 to 1.2 million new households form every year, yet the recession has dramatically slowed that process.
Years of potential supplyHowever, even if the housing recovery speeds up and the number of new households returns to a more normal level, another issue looms that will not only affect demand, but home prices as well: vacant lots. The construction boom and subsequent downturn has resulted in millions of vacant lots that developers had prepped for new-home construction that never happened. In the area surrounding Naples, Fla., for example, including Collier and Lee counties, there are just 1,081 new homes for sale, a seven-month supply, but more than 13,000 vacant lots prepared for construction. "There are years of supply in most of the marquee markets that you talk about," said Tim Cornwell, a demographer and principal for The Concord Group, a real estate consultancy in San Francisco. "If a huge demand started up, there are a ton of builders that would build them for you."
The homes would still have to be constructed, contractors hired and materials purchased. But the lots are prepared and the land costs are cheap. Even if the housing markets in areas like south Florida improve dramatically, the supply of new homes can easily rise to match the demand, no matter how high the demand gets. That will cut into the potential upside for home prices.Of course, despite the limited supply available for sale today and limited upside in terms of price appreciation, some borrowers just prefer new construction. If you're in the market for a new home, be prepared to compete with other homebuyers over the few new listings left on the market, especially if you're shopping for a new home that was recently finished.