Short Supply Could Be Causing Long-Term Market Changes

In his monthly column in the  Sarasota Herald-Tribune, chief executive officer of Premier Sotheby’s International Realty, Budge Huskey, breaks down the current market trends.

The news is filled with stories in  these last few weeks of automobile manufacturers slowing or halting production lines due to the shortage of electronic chips and other components essential for today’s sophisticated vehicles. A recent report indicated total new car sales volume will be off more than 20%   this year and, as a result, both Ford and General Motors are forecasting earnings down between $1.5 to $2.5 billion at a time when more people than ever wish to buy.

The disruptions and delays in supply chains of both finished products and raw materials are having widespread shocks across almost all industries, ultimately limiting the pace of our post-pandemic economic rebound. While demand is off-the-charts due to record household wealth, trillions of dollars of additional liquidity through aggressive monetary and fiscal actions, and people just wanting to return to normal, it means little when there’s nothing to buy. It’s like standing in a mall with a ton of money in your pocket staring at empty shelves.

2021, to date, has proven a supply-side story in real estate as well. We have watched over these past months as markets with historically balanced levels of resale inventory averaging six months have dropped to below one, creating a feeding frenzy serving to accelerate prices. And though no one expects current levels to continue indefinitely, some opine we have entered an extended period of low inventory fundamentally changing the dynamics of the market.

In times past, the answer for dwindling inventory in the resale sector was found in the expansion of new construction. At its peak, the number of completed new construction homes delivered to the market exceeded 2 million nationally. After recovering from depths of the great recession, annual completions have trended within the range of 1.3-1.5m, a marked improvement yet well below the amount economists state as necessary to align with overall population growth and demand. And that was before the current supply chain issues.

Recent conversations with regional homebuilders are eye-popping, with many electing to pause new home starts due to sharp increases in the cost of construction materials and the inability to provide meaningful customer prices. Others are resorting to rationing and auctions, with accelerated sell-outs of existing communities leaving little to no available sites ready to permit. Some anticipate the number of homes delivered in the second half of this year to be potentially half of what was projected only months ago. As the percentage of new homes sold has risen during recent years from about 10% to over 20% of total sales, the restricted flow on the horizon is yet another blow to the selection available to future buyers.

Finally, yet another shift has served to reduce the number of available homes for sale is the advent of institutional landlords such as Blackstone and Colony. These firms, often REITS or private equity companies, have quietly amassed millions of homes across the country in mostly moderate price ranges to place in rental pools, often outbidding traditional buyers with all-cash offers and quick closings.

In this exceedingly bright world of 6-8% GDP growth forecasts and an unprecedented desire by people to live along the Florida Gulf Coast, we somehow need to find the button to speed up the conveyor belt a little faster in the balance of the year to bridge the gap between actual and potential.

Budge Huskey is chief executive officer of Premier Sotheby’s International Realty.

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