The Data Says Buy A $900,000-House

By Geoff Smith

If you are looking for a new home under the $400,000 price-range, I know how competitive it is. But after some serious research, I have found a solution for you: go buy a $900,000-house.

If only it were that easy!

I just finished reading through Smart Real Estate Data’s third quarter newsletter and I’m stunned again by the lack of inventory available to most homebuyers. Our homebuilders can’t seem to catch up to the demand that is out there.

Inventory is measured in ‘months of supply’. The numbers reflect the months it would take for homebuyers to buy up all the currently listed homes if no new houses came onto the market. Experts consider a healthy housing economy to have 6.5 months of supply. Why is it unhealthy for there to be more or less? Supply and demand.

If you have less months of supply, then the demand is stronger than the supply and home prices rise quickly as buyers compete for the relatively low number of houses on the market. If you have more than 6.5 months of supply, then it’s a buyer’s market and values can drop as sellers compete for the relatively few buyers.

In the below $300,000-market, there are less 2.5 months of supply. That is one of the lowest months of inventory in the history of people keeping track of these numbers. In the $300,000 to $400,000-range, it only rises to just above 2.5 months. The $500,000 to $600,000-range is where the market finally starts getting healthy with about 6 months of inventory. Above that and it quickly gets unhealthy again with inventories above 7.5 months.

By the way, that $900,000 to $1M-range I mentioned at the beginning of this article has well over 10 months of inventory. It is a good time to get a deal in that range.

Based on the laws of supply and demand, prices on sub $400,000-homes are rising and on the $600,000-homes are lowering. Maybe someday everything will be priced around $500,000!

Obviously that won’t happen. But the laws of supply and demand are making the lower priced homes even more expensive, eventually creating even less inventory for a market already starved for inventory. Capitalism usually has a way of evening these kinds of things out. But building houses in the sub $300,000-range is a hard thing to do these days.

Land has gotten more expensive in the metro area. Builders are having to pay more to comply with an increased number of regulations that most residents want, and pay more for increased impact fees which help fund capital improvements to fire, police and other municipal departments. There is a labor shortage in the construction industry, so builders are having to pay more to lure subcontractors away from other builders. And with unemployment so low in general, we are not seeing employees from other industries jumping over to meet the demand.

The average price of a new home was $334,977 for the third quarter. With the increased costs, the builders are having to build more expensive homes to keep their margins. But if you look at the more expensive homes – there is a relative glut. The demand is for the lower-priced homes.

In the coming years, it’s very possible that we could see more effort from both the private industry and the public, to find creative ways to build more, lower-priced homes.

Some cities and counties are seeing this as an ‘affordable housing’ crisis where many of the people who work in their police, fire and retail service sectors are not able to live close to where they work. I’ve heard some folks try to blame the developers. But developers are pretty simple creatures. If the project will make their business money, they’ll probably build it. If it will lose their company money, they probably won’t. They know the demand is there, it is just hard to make the numbers work.