Offering a selection of homes to potential buyers increases the possibility that the customer signs a contract.
Much like an array of new cars under bright lights and colorful flags, the physical presentation of a new home can evoke buyer's emotions, along with weighing their financial abilities. While existing homes may not be as competitive on currency and ideal condition, their physical characteristics (good and bad) are readily apparent.
Since first-time buyers have pulled back from their normal 30% share to under 20% of the new-home market, the repeat buyer is more important than ever. But, given the slow recovery, home sellers often wait to buy until the sale of the current home is assured. By then, their turnaround time is short and a ready-to-occupy home has a distinct advantage.
Producing an inventory of new homes presents challenges in today's market. Difficulties start with builder access to financing and end with buyer hesitancy and ability to obtain a mortgage. Builders' financing hit a wall at the start of the recession and only recently has seen some relief. NAHB's quarterly survey of acquisition, development, and construction financing reveals the trend.
From 2008 to 2013, few builders reported an improvement in access to any form of credit. That same minimal access remains for the purchase or development of land. Hence, there remains a shortage of buildable lots that's driving up the price of remaining lot inventory and preventing large-scale speculative building in many markets. Debt for vertical construction has begun to appear in limited amounts from financial institutions. The continued reluctance and regulatory limits of banks to lend to builders has increased the use of private funding mechanisms to as much as a quarter of the builders.
The drop in residential construction (and a similar fall in commercial construction) induced many construction workers to find jobs in other industries. Since 2009, the fall in unemployment for those formerly in construction meant more than 1 million workers found a job or left the workforce. But the construction industry gained only one-half million workers, meaning half of those former construction workers found jobs in another industry or left the workforce entirely.
The loss of experienced workers is aggravated by relatively few young workers entering construction trades. So, even if lots are available, finding trained, available workers has slowed home building's revival.
Even with these two significant input hurdles, builders have increased the new-home inventory by 50%. For-sale inventory dipped to a record low of 143,000 in mid-2012, but has slowly revived to 216,000 by mid-2015. The share of for-sale homes that are complete and ready to occupy has dipped to one-fifth of the new homes for sale as builders struggle to add inventory in the face of the supply chain bottlenecks and at the same time keep inventory close to the current sales pace.
The ultimate governor of the correct level of inventory is the level of buyer interest and the ability and willingness of those buyers to purchase a new home. Buyer demand has been tossed around by the slow economic recovery, little to very slow increases in incomes, and tight credit standards. Selling new homes also has been limited by the low turnover rate in the existing home market.
If potential home buyers can't find what they want in the existing home market, a new home should have an advantage. However, 70% to 80% of new-home buyers must sell their existing home before buying a new home, and a low turnover in the existing market reduces the number of potential new-home buyers.
Even in normal times, the volume of existing home sales is four to five times the volume of new-home sales, so low existing inventory also discourages home sellers since their potential choices for another home is limited. Increasing new-home sales awaits more existing homeowners who are willing and able to sell their current homes.