New Home Construction Is Down Almost 22% From a Year Ago. Are Buyers Looking at a Continued Lack of Inventory?

Limited inventory has been hurting buyers for several years. Will it persist?

There's a reason so many buyers have struggled to purchase a home over the past couple of years. Not only have real estate prices been sky high, but inventory has been really limited. In fact, it's that lack of inventory that's contributed to higher home prices. And it's hard to know when inventory will start to pick up.

Now, when we talk about real estate inventory, there are different kinds. One is existing homes, which refers to homes that have previously been lived in. The other is new construction. And the Census Bureau reports that housing starts, which are a measure of new home construction, fell 1.4% in December compared to November. More notably, new construction activity declined 21.8% from the previous December. And that's not necessarily great news for buyers.

Are buyers in for another year of limited property listings?

Let's be clear about one thing with regard to housing starts. The fact that they were down in December may not impact the 2023 real estate market all that much.

The reason? It takes a lot of time to construct a home. There are permits to be gathered, inspections to be had, and construction materials to be ordered (some of which can take months to come in). So all told, a drop in new construction may not impact this year's housing market so much as next year's.

But if the trend of declining housing starts continues, it could spell trouble for buyers. Housing inventory has been limited since the latter part of 2020. Back then, it was easy to see why homeowners wanted to stay put rather than list their homes during a pandemic. And it's also easy to see why sellers may be hesitant to put their homes on the market these days.

In 2022, mortgage rates rose sharply. And while they've fallen modestly in January, they're still considerably higher than they were a year ago.

In fact, borrowers who take out a mortgage today are looking at roughly twice the rate they would've paid in early 2022. Because of that, many would-be sellers are no doubt opting to stay in their homes and wait for borrowing rates to come down. That way, when they purchase their replacement homes, they won't get stuck with an exorbitant mortgage rate.

The problem, though, is that we don't know when mortgage rates will slip a notable degree. So all told, we could be in for an extended period of low housing inventory.

Buyers shouldn't lose hope

Real estate inventory may be down right now. But at some point, it should pick up -- even though we don't know when.

Though buyers shouldn't give up on purchasing a home, they should also pay attention to factors like mortgage rates and housing starts, as that data could help guide their decisions. Someone planning to push a home purchase to 2024 instead of 2023 to capitalize on higher inventory levels, for example, may be better off pursuing a home search now, since things may not end up being all that different in next year's housing market.