Why aren’t builders creating more housing inventory?

Today, the U.S. Census Bureau reported that housing starts hit 1,534,000 for July, missing estimates. Permits, on the other hand, beat estimates, coming in at a seasonally adjusted rate of 1,635,000. Positive revisions to the previous data were made, but not by very much. This mixed bag of results reflects the typical variability in the data that occurs when not too much has been happening in housing except that monthly supply has been rising for the new home sales market. Homebuilders are navigating their housing stock well to make sure not to give up too much on the margin side of the business in the future.

The previous economic expansion from 2008 to 2019 had the weakest housing recovery ever following the bust. I have often said that both purchase applications and housing starts would be limited until we hit the period of favorable housing demographics from 2020 to 2024.

Specifically, I said that purchase applications would not get to 300 in the MBA index until 2020 to 2024. During this period, household formation will create the mortgage demand needed to push applications to that level, and purchase applications did get to this level right before COVID-19 hit in February of 2020.

When considering the future trend for purchase application data, it is best to exclude the COVID-19 makeup demand in the second half of 2020. This rule pretty much holds for all housing data. If you ignore that big move in the second half of 2020, you can see that we currently do not have a credit boom, but rather solid demand from replacement buyers.