Does the Housing Market Need More Homes? One Expert Thinks Not

A man and woman standing in a partially constructed new home and looking at plans on a work table.

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Today's buyers struggle with limited inventory. Here's one expert's take on the issue.

There's a reason so many buyers are struggling to purchase homes these days: Housing inventory has been extremely limited since the start of the year. An influx of homes typically hits the market during the spring and summer, but this year, that didn't happen.

As of the end of August, the supply of homes for sale totaled 1.29 million, representing a 1.5% decline from July, reports the National Association of Realtors. Compared to the previous August, home listings are down 13.4%.

All told, those 1.29 million units for sale represent a 2.6-month supply of homes. But it typically takes a 5- or 6-month supply to create an equalized housing market -- one in which neither buyers nor sellers have a notable upper hand.

Right now, the housing market clearly favors sellers. And buyers keep paying sky-high prices for homes because they want to capitalize on today's mortgage rates, which are sitting near historic lows.

Based on all of this, you'd think the solution would be clear: build more homes and increase housing supply. But one real estate expert insists that's not the answer.

Do we have enough homes already?

Dennis McGill, director of research at housing data firm Zelman & Associates, says the current supply of homes for sale doesn't indicate a need to build more homes. He also insists that demographics do not support more home construction.

McGill explains that U.S. population growth is on a decline, and that alone is sufficient reason to not build too many more homes. While the demand for properties may be high right now, overbuilding could mean that in time, there are too many available homes and too few people looking to purchase them.

Homebuilders don't agree. And since the housing market clearly lacks inventory, it's easy to make the case for new construction.

Right now, though, that's a costly prospect. Due to supply chain issues fueled by the pandemic, the cost of many common building materials has soared. In fact, the average buyer of a newly built home is paying $36,000 more.

These supply chain issues will hopefully resolve in 2022, and from there, the cost of a newly built home should begin to come down. But while the price tag for new construction may evolve to become less shocking, there's still the question of whether it makes sense to keep building new homes, given the trajectory of population growth.

It's an interesting question to contemplate. Right now, though, buyers are desperate for homes, so builders who construct them may have a pretty easy time moving those properties.

When will housing inventory open up?

To be clear, the current glaring lack of housing inventory isn't due to a slowdown in new construction. Rather, many sellers have held off on listing their homes, most likely due to pandemic-related uncertainty. At the same time, low mortgage rates have made more buyers interested in purchasing homes.

In time, more sellers should change their tunes and put their homes up for sale, and mortgage rates should rise. And that combination is what it'll take to help the housing market finally cool off.

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