Fitch: Tight Housing Inventory Hampering Housing Recovery

Fitch Ratings, New York, said the long, slow four-year recovery in the housing market stems in part from low housing inventories.

“On an absolute basis, inventory has not expanded as much as in past recoveries, leading to less selection for buyers,” Fitch said in a report. “This is especially true for existing home sales but is evident for new home construction as well.”

Existing home inventory fell to 1.79 million (3.9 months of sales) in December, down 12.3% compared to November and off 3.8% from one year and two years ago and down from a July 2007 existing home inventory peak of 4.04 million. HUD and the Census Bureau reported new home inventory as of December at 237,000 homes (5.2 months) compared to 231,000 (up 2.6%) in November, 217,000 (up 11.8%) a year ago and 187,000 (up 26.7%) two years ago. The peak new home inventory was 572,000 (7.3 months) in July 2006.

Fitch Director Robert Curran said part of the issue that has dominated the recovery so far is the limited supply of better located lots suitable for the trade-up market.

“In general, broad lot development has lagged as many land developers left the industry during the downturn and those remaining were cautious or financially constrained in their subsequent development activities,” Curran said. “More recently, additional capital has been committed to land development, but the sector is still playing catch-up.”

Curran said current homeowners who may want to buy another existing home or newly built home often put off purchase due to limited selection. “Also, first-time homebuyers find there are limited affordable new-home inventory options because builders have been largely concentrating on constructing trade-up housing and aggressively raising prices,” he said.

Fitch said a supply shortage also affects home prices. “National home price inflation has narrowed during the past two years but not as much if inventories were deeper, which is especially the case in California and other coastal markets,” the report said, noting the national Case-Shiller Home Price Index expanded 9.6% in 2013, 6.6% in 2014 and 5.3% in November (versus November 2014).

“Looking to 2016, at least a few public builders are opening or planning to open subdivisions in outlying communities and offering more affordable housing targeted to first-time buyers, including MDC, Meritage Homes and, especially, D.R. Horton,” Curran said. “However, we do not see indications that meaningfully higher industry inventory, new or existing, will be available this year than was the case in 2015. Incidentally, public builders do have sufficient land under control to support considerably greater product offerings.”

Fitch project new home sales prices to rise 2.0%-2.5% in 2016 as somewhat lesser sales gains in high-price coastal markets and some increase in the share of total new home sales to entry-level/first-time homebuyers counters the effect of limited inventory.