Homes in Short Supply but in Hot Demand
According to the Wall Street Journal article, “The Next Housing Crisis: A Historic Shortage of New Homes,” the United States is facing what appears to the next housing crisis (https://www.wsj.com/articles/american-housing-shortage-slams-the-door-on-buyers-1521395460?mod=searchresults&page=2&pos=9). This housing crisis is not similar to the last housing crisis, which contributed to ‘The Great Recession’ in 2008. The last housing crisis was the result of a large decline in the price of houses after the housing bubble collapsed which lead to mortgage delinquencies and home foreclosures. However, this housing crisis stems from fewer homes being built per household in the United States compared to almost any time in history. Home construction per household remains close its lowest level reported.
This housing crisis has many perplexed since the economy is booming and jobs are plentiful. While the demand for housing is stronger than it has been in recent years, land and construction costs have substantially increased since the last housing boom. Many homebuilders have shifted their focus from starter homes to higher-end properties. Millennials, which make up the largest generation since the baby boomers, are now looking to be homeowners and seeking to purchase starter homes. Therefore, the large demand for starter and/or mid-priced homes is not being matched with supply. Construction is not meeting the rising demand for starter homes. Furthermore, the overall inventory of new and existing homes for sale recently reached its lowest level on record. This shortage of homes has driven up the prices of homes and has led to bidding wars. In addition, there is a mismatch between where houses can be built and where people want to live. Here, is a visual representation from the article of the mismatch in housing inventory and housing demand. In most cities, the supply of houses does not reach the normal levels of houses available.
Housing inventory is more difficult to manage than a retail company’s inventory. Homes take months or even years to build. In addition, housing developers and construction companies have limited land to build on. In general, inventory is one of the most expensive assets of a company. Furthermore, having vacant homes is costly to developers. Therefore, developers would rather have a shortage of homes than an excess of homes since maintaining an excess inventory of homes puts great financial strain on the company. While retail companies generally have a steady supply of materials to produce their products, the house industry replies on the inventory on land, construction workers, and construction materials. Therefore, as the demand increases for particular products, retail companies can manage that demand and produce more products. However, the number of construction workers and land availability limits the housing industry in its ability to produce homes. Another difference between the two industries is the housing market is more volatile than retail industry, which impacts the ability for developers and construction companies to predict the demand for houses. It is easier for retail companies to forecast their demand and manage their inventory based on their expectations.
The goal of inventory management is to satisfy product demand while maintaining an efficient stock supply. The housing industry has many limitations that affect its ability to properly manage its inventory. Inventory needs to match what the consumer’s wants, needs delivery time, and proper work. In the past, it was easier to manage housing inventory since houses were cookie cutter and building supplies were micro managed even down to the number of nails per roof. Homes are now being customized so inventory is not managed until the completion of the design of the home. The inventory management systems used in most companies cannot be applied to the housing market due to the limitations of the housing market and the variable demand and variable leadtime nature of the housing market. However, the main goal of those inventory management systems of satisfying the customer is still valid. The housing industry has major effects on the overall United States economy. Therefore, changes need to be implemented in the housing regulations so the housing demand can be meet.
Here, is article that discusses the low housing inventory in Richmond (http://www.richmond.com/business/local/economy-looks-great-but-housing-inventory-too-low-economist-tells/article_3920df67-de37-5220-83ce-8dc8c04f7b57.html).
Erin,
This is an interesting post and a topic that I would not necessarily consider to be associated with supply chain inventory. You discussed the fact that homebuilders are shifting towards building custom-high end homes instead of starter homes. I have seen that first-hand in my hometown. Several million dollar housing communities have been built, and although I have no clue who is buying them, there are significantly more options in the high-end price range than starter homes.
I think this is partly do to a trend among young, working men and women. While in the past the American dream has been pitched as owning a house with a small yard and white picket fence, young couples are opting to rent instead of purchase homes. This is a result of increasing student loans and fear of more debt with a mortgage. Until this changes, the housing market will continue to struggle.
Erin,
What a cool comparison between housing and retail inventory. I had never thought of it that way before. Much like Daniel, I immediately thought about the effect on me in the near future. I’m from Philadelphia, and I hope to return there after graduation next May. When I didn’t see Philly on the list of cities in your post, I decided to do some investigating of my own regarding the housing market in my home city. As it turns out, Philadelphia is not immune to the skyrocketing housing prices caused mostly by an increase in demand. And in this situation, demand is certainly not constant, which makes it a lot harder to manage inventory and predict how many houses will be sought after. This introduces a contradiction for developers, like you said, as they want to keep prices high and homes full. To level out supply and demand, the Philadelphia City Council aims to pass a law that requires property builders to use 10% of their budget for more basic, below-market units. The City Council hopes this will increase affordability as a result as well as keep developers happy with homes full.
https://www.wsj.com/articles/you-got-priced-out-of-philadelphia-the-spread-of-hot-housing-markets-1514975400
Erin,
This kind of post is certainly not what you want to hear when there is only a couple years left in college. Dallas has the same problem as Richmond has, as your article picture showed. Developers have so many factors to consider when dealing with business planning. They have to account for consumers and their changing tastes, possible changes in material prices, and problems that involve the city. The article about Dallas emphasizes the point of location and how important it is in real estate. Dallas is a popular city that people want to live in but there are specific areas that stand out more than others. The area where I am from is mainly out of reach for most home sellers due to already high prices, but the other attractive areas are seeing large price increases due to the high demand and low supply. The homebuilders are now stuck with a dilemma, since they have limited space to work with. They are not able to expand in Dallas areas like uptown because there isn’t anywhere to go. It will be difficult to expand in lower Greenville because they would be expanding into undesirable territory. The city is trying its best to improve living conditions around Dallas, but this is a slow process and home developers have to take this into account when working with their strategic planning, business planning, and sales and operations planning. New up and coming areas are a good place to start building, but they run the risk of the house being vandalized or the house not being bought. I wonder if developers meet with city planners to try and help their strategic planning.
Source: https://www.dallasnews.com/news/southern-dallas/2017/04/13/dallas-public-housing-residents-struggle-homes-become-distant-citys-core
Erin,
Thank you for your insight into this new sort of housing crisis. This shortage of inventory is an interesting one to me because housing is so different than any other sort of retail environment. Building new houses is not as easy as manufacturing more shirts or another retail item. The supply chain processes involved in building a house are infinitely more complex than manufacturing smaller items. Additionally, building a house required land which, as you mentioned, is getting scarce. Soaring home prices are causing people to delay buying homes and are making investors nervous about a new housing bubble. The rising prices will cause more mortgage defaults which was a clear sign of the 2008 crash. This inventory shortage, which is an Operations Management issue, is causing spikes in prices which is good for housing firms, but bad for home buyers. Fixing the inventory supply will help alleviate some of the stress felt by investors and help level out the housing market. Operations Management can help home builders more accurately predict demand and avoid spikes in home prices
Source:
https://www.nationalmortgagenews.com/news/housing-bubble-or-not-the-real-estate-market-is-in-trouble
Erin,
Thank you for your post. This is actually very interesting to me, mainly because I am only a couple years away from wanting to purchase a home of my own. Hopefully by that time, the housing supply will be high, and demand will be low so that my house can be much cheaper. Because of this post, I started to do some research of my own as to why the housing market is out of sync. According to the articles that I read, there are a few key trends that are leading to this current housing issue.
First of all, not only is there limited land to build on like you said, but there is also a shortage of construction workers themselves. Therefore, it is very difficult to meet the current rising demand with limited space and capital. Second of all, there really are not enough homes for sale. After the housing crisis in 2008, a lot of investors decided to invest in real estate. This means that they are more interested in renting their homes than selling their homes. In addition to this, studies show that the baby boomer generation is reluctant to give up their homes. According to a study, 72% of baby boomers say that their current home satisfies their needs and feel no need to sell any time soon. A combination of these trends has led to a lack of homes for the rising millennial generation. Therefore, I agree with you. Something definitely should be done with housing inventory management so that the supply and demand can be closer to equilibrium.
References:
https://www.usatoday.com/story/money/2017/10/23/heres-why-house-hunting-so-frustrating-right-now/786034001/
https://www.usatoday.com/story/money/2017/08/10/sale-home-inventory-20-year-low-baby-boomers-stay-put/555127001/