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Are we in a bubble? Yes, no and maybe

by James McClister

The affordability paradox

Demand is congested in the lower end of the market, where Millennials and other first-time buyers are waiting to break into homeownership, but that’s not where builders are building.

In fact, according to homebuilder Will Holder, president of Houston-based Trendmaker Homes, current market conditions (i.e., buyer expectations, cost of labor and materials, lot availability, regulations, etc.) are such that affordable demand can’t be satisfied in the new construction market.

“We’ve created a scenario of impossible-to-build, truly affordable homes anymore,” he said. “I, personally, don’t know how to do it.”

Since 2012, home inventory has shrunk by roughly 450,000 homes, according to Trulia. But the share of “premium homes” has risen, from 42.7 percent of the market to 46.2 percent, while the share of “starter homes” has shrunk from 30.2 percent to 27.7 percent. Middle-market home inventory has also dropped.

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Richardson speculated that in order to encourage more construction in the sectors where it’s needed, banks will have to loosen access to credit for builders. But according to her, that’s not happening.

“Where we need loosening in the market, new construction, we’re seeing banks actually tighten,” she said. “That’s a mistake, especially when you see where the demand is.”

So, to recap: we’re not in a bubble, despite prices running counter to sales, because there remains demand in the lower end of the market, which can be satisfied through building, but current market conditions don’t really allow for affordable building…so it can’t be satisfied.

The next possible solution would come from current homeowners listing their more affordable homes and buying new construction homes or homes in a higher price bracket. But that’s not happening either.

“A lot of (homeowners) are staying put, choosing to renovate and stay in their existing homes instead of speculate on a growing market and get something bigger,” Richardson said.

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