NOV 14, 2012 11:52am ET

Homebuilders No Longer Constrained by Excess Supply, REO

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The excess of supply of homes built during the last housing boom has finally been reduced to a level where builders will have to ramp up construction next year, according to an economist at IHS Global Insight. 

The Census Bureau recently reported that the homeowner vacancy rate fell to 1.9% in the third quarter, down from a 2.9% peak in 2008. 

The drop in the vacancy rate shows “we have run out of this excess inventory,” economist Patrick Newport told National Mortgage News.  

“It’s a great reason for feeling good about the housing market next year. The builders are going to have to start ramping up at a higher rate than they are now,” the Global Insight economist said.

A 1.6% homeowner vacancy rate was considered the norm before 2005. But now the HVR norm will probably be in the range of 1.7% to 1.8%. Newport explained that some of the excess supply was built in places where people don’t want to buy homes now.

“The fact the housing prices are going up is the strongest sign that the housing market has tightened and we need to build more homes,” Newport said.

Unless there is a recession, “we could see a lot more home construction than most people are forecasting,” he added.  

A JPMorgan Chase Bank economist pointed out in a recent research report that household formation “accelerated” last year, sparking a 659,000 decline in the number of vacant units.

But the majority of demand for housing was met by filling vacant housing units, not new construction, according senior economist Robert Mellman. With vacancy rates coming down and home values rising, that should change to the benefit of builders. 

“So homebuilding can be expected to increase substantially over the next year as a larger share of the increase in demand for housing units is met by new construction,” Mellman said. 

The Census Bureau report also shows the number of vacant single-family homes for sale fell to 1.48 million units in the third quarter, down 20% from the same period in 2011. The number of vacant homes and REO on the market peaked at 2.27 million in the first quarter of 2008.  Builders don’t like to compete in areas with high REO and vacant home sales.

The last time the number of vacant homes for sale was at the 1.48 million level came in 2005–just before the housing market tanked.

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