After a long period of builders being reluctant to construct new homes, construction is now on the rise again. In the second quarter of 2018, the number of new constructions was 3336 among four Southern California counties, comprising Los Angeles, Orange, Riverside, and San Bernardino counties. This amounts to a 19% increase from the prior year. There’s just one problem, though: Those homes aren’t selling.
There are multiple factors possibly at play here. The most obvious is that overall sales are down as a large contingent of would-be buyers are unable to afford stepping into the high-priced market. Another is the type of homes being constructed. A significant portion of new constructions are high-end single-family residences, as opposed to affordable housing complexes. While the segment of the population that would be in the market for a high-end home is doing all right financially and could probably afford to buy something, they don’t actually have a reason to buy in a high-priced market. In essence, builders saw a demand for construction, but were too interested in return on investment value rather than actually getting a sale and missed on the demographic.
An expected response to overshooting on inventory would be that sellers may start to notice that they aren’t getting a sale, and decide to drop their listing price or accept a lower offer than they would ideally want. Now in the last quarter of the year, we’re already seeing this happening as the number of price cuts continues to rise, though not at the same pace as inventory.