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March 2021

Gap between home sales and starts reaches historic level

March 4, 2021

Homebuilders can't keep pace with demand - and that gap reached historic levels during 2020, according to the National Association of Home Builders (NAHB).

Home building staged a dramatic rebound during spring 2020, which NAHB officials attribute to "low mortgage rates, an evolving geography of housing preferences, and favorable demographic tailwinds."

Using Census measures of home construction, NAHB tracks seasonally adjusted annual rates of single-family starts and single-family home sales. (Note: "Starts" represent all home builds and account for the beginning of construction of homes, whether that construction is for a home already under a sales contract, being built for-sale, being built for-rent, or undertaken for a construction contract, such as a custom build on an owner's lot. NAHB defines "new home sales" as signed sales contracts for new builds, whether that home has started or completed construction. This metric is a counterpart to NAR's pending sales index, rather than existing home sales, which account for closed contracts.)

Robert Dietz, NAHB's chief economist and senior vice president for economics and housing policy, plotted the difference between the monthly rates of for-sale starts and sales. His resulting graph depicts a peak at the end of 2020, indicating builders are selling homes that have not begun construction in greater numbers. In fact, Census estimates and NAHB surveys indicate a 69% jump in such home sales compared to a year ago.

In analyzing current and historic data, Dietz found three relevant periods over the last two decades where sales and for-sale starts disconnected.

The first period occurred during the housing boom when for-sale starts exceeded sales. That led to an inventory overhang that became part of the housing crisis preceding the Great Recession.

Plummeting single-family starts during the Great Recession marked the second period. That downturn, coupled with sales helped by the three stages of the federal home buyer tax credit, reduced excess inventory, which had peaked during spring of 2008 when the months of supply for new homes topped 11.

"The script is flipped today," Dietz stated. Months' supply for new homes is down to "a lean 3.3," and the supply for existing homes is at a "very tight" 2.8, according to NAR data. Dietz said this third period of disconnect, occurring now, "is a signal of the degree to which home building will need to play catch-up with current demand.

With home building the last decade, (sometimes referred to as the Long Recovery) it was characterized by underbuilding due to supply-side limitations such as labor availability and law/regulatory cost impacts. Dietz described the lagging pace of construction relative to current sales as "an intense, compressed version of general economic trends." Builders also cite lumber and material issues as additional factors in delaying some current construction projects.

The NAHB chief economist expects solid levels of home construction in the coming months, propelled by low levels of existing inventory, rising resale prices relative to new construction, strong builder confidence, and sales exceeding for-sale starts.