If They Don't Build Homes, You Can't Sell Them

Residential sales levels are constrained by a lack of new inventory.

May 11, 2016

Home sales have been volatile on a month-to-month basis, but on average they’re almost exactly where they were last year: at an annual sales pace of about 5.2 million units. Closing rules that took effect in October likely played a role in the inconsistency, as did abnormal winter weather trends.


Notwithstanding the ups and downs of the transaction pace, there appears to be a steady stream of buyers in the market, so we can expect sales to hold steady this year and settle at a pace close to where they were at the end of 2015.


The chief constraint continues to be inventory levels, which remain historically low. There were only 2 million homes available for sale nationwide at the end of March. That’s just a 4.5-month supply at today’s sales pace. Additional inventory will spur more transactions and moderate home-price growth.


The latest annual home-price growth of 5.7 percent is unsustainable because incomes are rising by only 2 percent per year. Either demand will have to fall or supply will have to increase to align price and income. Many potential first-time buyers are telling us they are less likely to buy now, since prices are moving beyond the affordable range. That is why first-time buyers currently account for just 30 percent of the market, compared with the more typical 40 percent.


Given that affordability is a major factor in home buying, the best way to improve the market is to bring in additional supply. Builders should be all over this. Sales data indicate they are selling everything they build within three months on average, so why aren’t they building more? If inventory levels were higher, overall home sales could easily rise by another 15 percent from current levels.


Let’s hope whatever is holding builders back—whether it’s the availability of construction financing, local zoning regulations, or the availability of skilled construction workers—can be addressed soon, because only when builders ramp up production can we hope for a sales expansion with staying power.


Lawrence Yun
Chief Economist and Senior Vice President of Research at the National Association of REALTORS®

Yun oversees and is responsible for a wide range of research activity for the association including NAR’s Existing Home Sales statistics, Affordability Index, and Home Buyers and Sellers Profile Report. He regularly provides commentary on real estate market trends for its 1.3 million REALTOR® members.

Dr. Yun creates NAR’s forecasts and participates in many economic forecasting panels, among them the Blue Chip Council and the Wall Street Journal Forecasting Survey. He also participates in the Industrial Economists Discussion Group at the Joint Center for Housing Studies of Harvard University. He appears regularly on financial news outlets, is a frequent speaker at real estate conferences throughout the United States, and has testified before Congress. Dr. Yun has appeared as a guest on CSPAN’s Washington Journal and is a regular guest columnist on the Forbes website and The Hill, an “inside the beltway” publication on public affairs.

Dr. Yun received his undergraduate degree from Purdue University and earned his Ph.D. from the University of Maryland at College Park.