4 minute read
Holmes on Homes
So what happens when builders go bust?
You’re living through it.. it already happened. Don’t worry – I haven’t lost my sanity and suggesting that our current new construction market is doomed. I’m just trying to grab your attention. Did I get it? Are you listening? This is a continuation of the conversation I’ve had with many of you over the weeks and months.. a continuation of the articles I’ve written about over the last year on our inventory shortage, the boom in demand and where it’s all going. So grab your favorite beverage and sit back and enjoy some fresh new perspective on this topic… here we go!
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The beginning of this conversation is the current market trends.. super low inventory combined with high demand is making for a bat-shit crazy market. Homes have increased in value at an unsustainable pace. Buyers are fighting for homes in most cases - not all cases as I don’t want to paint too ugly of a picture – but you get it, you can’t miss it. It’s in the news, on tv, you hear it on the radio – crazy housing market, right? The question I always get and the conversation I have most often is - how did we get here and where are we going?
The low inventory (and current market chaos) is driven by 2 main factors – builders that went bust and the current crazy high demand. Wait.. what do you mean builders went bust? Yes indeed.. this story starts around 2009. In order to know where you’re going – you need to take a look at where you’ve been. So let’s take a look back on builder inventory over the last 12 years.
It’s a distant memory for some and for some current homeowners – they didn’t even own during the last crash. However, it’s still affecting us today. One of the main reasons we have low inventory today is because inventory was not being created at our normal pace for the last 12 years. If you look at the average number of homes being built annually as an average over the last 20+ years, we just got back to that average in 2020. See Fig 1.
Figure 1
Figure 1 is a snapshot of annual closed sales for new construction for the last 15 years in our 7-county metro area. Notice something? The bottom fell out in 2009 and continued for 7 straight years only getting back to a normal amount of inventory creation around 2019. Think of new construction as inventory creation. No new construction will eventually equal no inventory to sell. BOOM! As the kids say.. mic drop.
Builders got pushed out of business in 2009. Nobody was buying new construction after the crash and there were a lot of people that went out of business. Small builders were done.. medium sized builders were done.. large national builders hung on and of course live to see another day. Today it’s a booming and thriving industry. Despite the costs of construction, people are buying new hand over fist – and it won’t stop regardless of the price (more on that later). So they’re back and it took until 2019-2020 to get to our normal, average annual count of new construction. This isn’t just a MN trend either. For our out of state readers – this happened to you too. This happened across the country. Ever wonder why every market in the country is going through the same inventory crunch?
So how does that extrapolate though the years to come? Simply put.. not very well! It’s going to take time to get back available inventory at normal levels. If you look at the supply side alone on this story, it’s going to take several more years of booming new construction inventory to put back in place all the missing homes that weren’t built over the years. This will no doubt take some time. As you drive around the Twin Cities you can see it everywhere – new neighborhoods in just about every corner of the Cities. Minneapolis & St. Paul are also making changes to allow for higher density single family homes too. Instead of allowing only a single family home, Minneapolis is allowing for 2 & 3 unit options to allow for more growth. It’s there.. it’s coming.. but it will take time.
So what about the other side of this conversation – the demand. The lack of inventory regardless of demand is certainly real as we just went over. However, the real monster in the room (and yes it’s not an elephant- it’s a monster sized tsunami with endless potential) is the demand.
Why is there such low inventory in a market with already low inventory – because the demand is at an all time high. In 2020 – pandemic year – a year in which the world was on pause.. anything but pause was going on in real estate. More conversation on this tsunami on page 10..
