Are Builders Intentionally Underbuilding?

With housing inventories so low, why aren’t homebuilders jumping in by ramping up production to meet demand?

A new housing report by Arizona State University suggests that homebuilders are methodically holding back their inventories and keeping the rate of new-home building low, despite population growth projections.

“New-home builders don’t appear too anxious to help meet the demand,” says Michael Orr, a real estate expert at ASU’s W.P. Carey School of Business.

A few years ago, during the housing bubble, homebuilding outpaced population growth. But builders are taking the opposite approach this time around. In an environment with tight underwriting for loans, builders are exercising some caution and restraint.

“They are trying to make sure they don’t overbuild like they did before the housing crisis, and they want to keep prices moving up,” Orr says. For example, Orr notes that in the Phoenix area, new-home sales rates are less than one-third of what is needed to keep pace with the projected population growth. He added that, with limited supply, builders are able to increase prices for new homes.

Those in the building industry have cited labor shortages, tight underwriting standards, and the rise in lot prices as a reason building hasn’t kept pace.

Source: “Why home builders aren't rushing to meet demand,” Phoenix Business Journal (July 9, 2013)