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The US housing market is getting squeezed, but relief doesn’t seem to be coming anytime soon.
Stuart Miller, CEO of Lennar Homes, laid out the full picture of the US housing market in a post-earnings conference call on Tuesday, explaining why the hopes for a sudden pickup in American homeownership may not be on its way in the near future.
Miller said on the call:
“As we’ve noted consistently over the past years, the overall housing market has been generally defined by a rather large production deficit that has continued to grow over the past year.
“While questions have been raised as to the real normalized levels of production that are required to serve the U.S. current population, we believe that production levels in the 1 million to 1.2 million starts per year range are still too low for the needs of American household growth that is now normalizing.”
This low supply of homes and higher demand then forces prices higher, keeping first-time buyers out of the market and contributing to the higher rates of renting and apartment-dwelling.
Miller does note, though, that it is hard to judge the housing market as a monolith. The San Francisco market is different from the market in Charlotte, North Carolina, which is different from the market in Stapleton, Nebraska.
There are some aggregate-level problems, however, according to Miller, that give insight into the problems facing all markets, and it has ushered in a new age for the total housing market.
“While measuring current production levels against historical norms of 1.5 million starts per year might be flawed logic, as there may be a new normal, we believe that the very low inventory levels in existing and new homes and the low vacancy rates and high and growing rental rates for apartments indicate that we are in short supply nationally.”
Now there is an obvious question to ask: If there is so much pent-up demand, then why don’t builders like Miller’s Lennar increase their pace of building to keep up with demand?
In theory, this would make more money for Lennar and alleviate some of the issues facing the market. The homebuilders, however, face their own set of issues that prevent them from accelerating building.
“Nevertheless, land and labor shortages will continue to be limiting factors and will constrain supply and restrict the ability to quickly respond to growing demand while the mortgage market and higher rents will continue to constrain that demand,” said Miller.
Additionally, the lack of supply is driving up completed home prices. Toll Brothers, the largest luxury homebuilder in the US, reported a huge increase in the sale price of its homes during its second quarter. This partially incentivizes homebuilders to keep supply tight to continue to drive this pricing power.
By using the term “new normal,” Miller is not only evoking recent economy ideas on the current slow growth of the global economy, but also expressing skepticism that the situation will change anytime soon. Miller notes that the cost constraints – labor and land – that are preventing Lennar from completing housing quicker are not going anywhere.
Additionally, in his opinion, there is little indication that the demand from Americans for new homes is going down in the near future. Thus, the tension between supply and demand that is restricting the market is unlikely to shift soon, in his opinion.
“We expect that these conditions will continue to result in a slow and steady positive homebuilding market and will enable slow, steady though sometimes erratic growth throughout the industry,” said Miller.