It’s hard to believe, but after four years of complaining about the low inventory of houses on the market, I am going to declare this year as the year of low inventory.
It was about three or four years ago when I heard Frank Norton, CEO and chairman of the Norton Agency, give a speech titled “What will You Do When Inventory Hits 0?”
The gist of the speech was that inventory of houses was going to keep dropping, not improving. And that if you are in the industry, you’d better prepare for a low-inventory market. Well, here we are today and inventory levels are still headed toward 0.
Housing inventory is measured by the months it would take for all of the housing currently on the market to get bought up. Economists have declared a healthy number as six months. Any less than that and competition for housing increases which drives up home values too fast. Any more than that and there isn’t enough competition to justify current values, so values start to drop.
Inventory levels for some markets in Atlanta are near two months. That is an all-time low.
The issue right now is that we’ve had more than 90,000 people a year move to Atlanta over the last four years and have averaged around 20,000 new building permits a year. Homebuilders are having trouble finding land and labor.
Unemployment is low for almost all sectors of the market, especially in the construction industry. That industry lost a lot of labor after the downturn with workers who either moved back to their home countries or changed industries. So builders need more labor to build more houses, but almost everyone that wants to is already working. So they have to depend on workers moving over from other industries to increase their capacity to build more, faster.
It’s also hard for builders to find that large expanse of land where they can build a 500+-home community anywhere close to Atlanta. The land that they are finding is much more expensive than what it was before the downturn. To make a profit, builders are having to build nicer homes or go to the cities and counties and request higher densities. Because of that, many of the newer communities are more expensive with homes starting at $400,000 and going up.
Most of the metro Atlanta area’s houses are priced below $400,000 so you can see why inventory in that market is at historic lows. But if you go over that price-point in most markets, the inventories are actually getting too high. Where buyers are fighting with each other for houses under $400,000 in most markets, they have the pick of the litter in housing priced higher than $500,000 in most markets.
It’s hard to tell what will happen next year. Everyone tries to be optimistic this time of year. I heard a theory that when salaries increase by 4 percent or more, people start buying houses. And, if that happened in Atlanta, people would start a buying spree because those in under-$400,000 homes would start moving up into $500,000+ homes. I like to think that makes sense. But we’ve been waiting for salaries to jump for a while now. It’s one of the Federal Reserve’s biggest concerns.
While our economy has been pumping in all sectors, we have not seen a great deal of wage and price growth. Everyone is guessing as to why, but the most consistent reason I’ve heard is that corporations have to keep prices and wages down to compete with their global competitors. You can’t charge more for your product if Chinese and South Korean companies are charging less. And you can’t pay the workers who build that product more if you can’t charge more for it.
That said, the global economy has been improving at a steady clip. There could be some relief there if foreign companies start improving their wages. Who knows? One thing is for sure: We’ll see.
Have a Happy New Year and let’s have a fantastic 2018!!