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It's not a buyer's or a seller's market in housing: It's a builder's market

Markets Insider
Markets Insider
 2021-10-14

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  • The US faces a dire housing shortage, but builders are enjoying their biggest rally in 15 years.
  • Builders aren't rushing to bring supply online - they're delicately balancing supply with booming demand.
  • "The builders do not care anything about the existing-home-sales market and they don't care about the housing shortage," an expert says.
  • See more stories on Insider's business page .

The current US housing market is definitely not one for buyers . And despite soaring prices, it's not necessarily a sellers' market , either.

The ones really doing fine in the housing market are the homebuilders. They're enjoying the biggest rally in 15 years, and the housing shortage is giving them unprecedented business.

The housing market has been on an absolute tear for nearly two years. Lockdowns in spring 2020 sparked a moving spree as Americans capitalized on record-low mortgage rates and the shift to remote work. Buyers snapped up homes at a voracious pace, and prices surged at the fastest rate in 45 years .

Home inflation has started to cool off , but the housing shortage still looms over the market. The National Association of Realtors estimated in June that the US has a deficit of 6.8 million homes. And while housing starts have edged higher, they're still way below what's needed to fill the gap.

Contractors are key to solving the shortage, but they're in no rush. Home construction and new home sales show "beautiful symmetry," Logan Mohtashami, lead analyst at HousingWire, told Insider about how, when sales dip, housing starts follow, and when home demand ramps up, builders increase supply.

"The builders do not care anything about the existing-home-sales market and they don't care about the housing shortage," Mohtashami added. "They'll always go slow and steady ... People want an oversupplied market, and we just don't do that in America."

Builders want to avoid another bubble

There was a time not so long ago when builders rushed to flood the market with supply: right before the Great Recession. Builders who contributed to the housing bubble found themselves with an abundance of homes but nobody to sell them to. Prices collapsed, contractors across the US were burned, and many were forced to close their doors. From the 2006 peak to 2011, employment in residential construction shrank by 46%, and it still hasn't fully recovered.

"The last cycle left a lot of people in the homebuilding industry scarred," Ali Wolf, chief economist at housing data firm Zonda, told Insider. "Developers, builders, and banks became much more prudent in pursuing and approving new deals."

"I get what they're doing," Mohtashami said. "If you look at the builders' margins, they're excellent."

The rising tide lifted some ships - and left others to sink

That's not to say every contractor thrived in the pandemic market. Firms with inventory in popular markets and those who could quickly bring more houses to market enjoyed stronger pricing power, since they were sitting on a product in high demand with very little competition, Wolf said.

Others were less fortunate, finding themselves entangled in supply-chain disarray. Timelines are critical in residential construction, and falling behind on schedule can crush a business, Wolf said.

"Builders have the power in sales, but have little power when trying to get homes built," she added.

Economists expect the market to cool throughout 2022 , giving buyers, sellers, and builders a reprieve from the frenzy of the pandemic. A slowdown in home sales and a reversal of the labor shortage should help builders better match supply with demand, Wolf said.

Until then, some firms will sink and others will swim.

"The pandemic provided the best of times and the worst of times for homebuilders," Wolf said. "It's really easy to say 'Why don't builders just build more homes?' But the reality is a lot more complicated."

Read the original article on Business Insider

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