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The entry-level home shortage: Will builders fill the void?

By Mike Wheatley | June 21, 2016

It always used to be that saving up for a down payment was one of the biggest hurdles for first-time buyers. But not anymore. According to a new Fitch Ratings report, the down payment problem has been surpassed by something else – a shortage of inventory.

Couple walking towards vertical house outline

Fitch Ratings says the current supply of homes is just 4.7 months, for both existing and new homes.

If that sounds like a lot, believe me it isn’t. It doesn’t even come close to what experts consider to be normal – a five and a half month supply of homes. For entry level homes, the supply is even less.

There is some good news though, with major building firms such as DR Horton, M.D.C. Holdings and Meritage Homes all indicating to Fitch Ratings that they’re looking to better serve first time buyers.

However one of problems with building for first time buyers is they’re one of the least profitable demographics to build for. Fitch notes that first-time/entry-level buyers account for just 32 percent of the market, which is well down from the average of 40 percent in the past.

TIME journalist Denver Nicks notes there’s now the additional question of what will happen next – will millenials buy up existing entry-level homes more quickly than such homes become available, or will builders take a gamble and start building more homes, hoping millenials will take the bait?

“It’s a chicken-or-the-egg situation,” Nicks wrote. “Are builders not catering to first-time homebuyers because the nation’s young adults aren’t likely to be purchasing? Or are young adults unlikely to be buying partly because there are relatively few homes that match their needs?"

Still, not to be so downbeat, the overall situation in housing is showing signs of improving. A recent Department of Housing and Urban Development report shows that new home sales are on the up, while the U.S. Census Bureau also reports increased home buying activity.

“So far new home sales have declined each month thus far in 2016, however are now up a whopping 24% from last April,” said Zillow Chief Economist Svenja Gudell. “This bodes well for homebuyers as Zillow shows that inventory is still down 3.4% from last year and less expensive homes are even less available.”

Mike Wheatley is the senior editor at Realty Biz News. Got a real estate related news article you wish to share, contact Mike at [email protected].
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