Inventory’s Low, So Why Aren’t More Homes Being Built?

The high cost of construction, labor shortages, and regulatory costs are just some of the factors that are keeping builders from making new homes, leading to a shortage of inventory that has caused concern among homebuyers as prices rise.

Even though the number of newly constructed homes showed a slight increase towards the end of 2017 according to a study by online real estate brokerage firm Redfin released on Thursday, these supply shortages are likely to continue.

The study found that 16.4 percent of all single-family homes for sale were for newly constructed homes in Q42017, showing an increase from 14.2 percent in the same quarter in the prior year. According to the analysis, the median price of new single-family homes that sold during the quarter was $377,800, up 1.6 percent on a year-over-year basis. Compared with existing homes, new construction sold at an average premium of $86,400 during the quarter, while existing home prices rose 7.3 percent year over year.

Rising construction costs are one of the key factors behind the spiraling prices for new homes, the study found. The estimated labor and materials cost of constructing a single-family home increased 1.2 percent on an annual basis in the fourth quarter to $244,000, the highest level since the Census Bureau began reporting it in 1988.

“New homes are more expensive than existing homes, and their prices tend to grow at a slower rate,” said Nela Richardson, Chief Economist at Redfin. “However, new homes’ slower price growth belies their advantage to buyers in the hottest markets. Buyers in these highly competitive markets have been attracted to new construction as a way to avoid bidding wars. They often find it’s easier to negotiate with a single builder than to compete with several buyers and negotiate with a traditional seller.”

Thus, despite record-high construction costs, housing starts rose to 1.3 million in January according to the latest Census Bureau data. Construction spends too had inched up slightly to $523 billion in January, a 0.3 percent rise over December 2017, according to the latest Census Bureau data on Construction Spends in Residential Housing that was released on Thursday.

To read the complete analysis click here.