Inventories Tight and Construction Hamstrung: Insights from the Fed Beige Book

The Federal Reserve released its quarterly Beige Book on Wednesday. The Beige Book is a summary of conditions for a number of industries in each of the 12 districts covered by a distinct Federal Reserve Bank. Here are a few of the highlights:

Home Sales

• “Home sales continued to rise in most Districts.”
• “Although homebuyer demand was high in the Boston District, low home inventories were restraining sales, keeping growth modest. Home sales were reportedly strong in both the Atlanta and Dallas Districts.”
• “The Richmond District noted low inventories were pushing up contracts to well above listing prices, and the Boston and New York Districts said multiple bids on properties have become more common.”
• “Tight inventories and strong sales led to rising home prices in many Districts, including Atlanta, Minneapolis, Kansas City, Dallas, and San Francisco.”

Construction

• “New home construction continued to pick up in most Districts, although the Richmond District said that a low supply of residential building materials had stalled construction.”

Banking and Finance

• “The Cleveland and Kansas City Districts noted a shift from mortgage refinancing to new purchases, and the New York, Richmond, Dallas, and San Francisco Districts reported an uptick in residential mortgage loans.”

While the tight regional inventories and price appreciation observed by Fed staff were not a surprise, the tight supply of building materials was. Inventories of both new and existing homes are near decade lows due to several years of low construction and a sharp decline in delinquencies and foreclosures in recent quarters. Rising prices may result in more inventories coming to the market (previously underwater owners or otherwise), but unless those sellers downsize or rent, they’ll purchase another single-family home leaving the supply a wash. This pattern coupled with rising household formation suggests a long-term need for additional home construction, construction that will be limited in the near-term.

The shift to purchase mortgage originations should benefit home buyers if it implies a burnout of refinance activity. A decline in refinancing would provide more capacity at banks on the purchase side. This excess capacity and dwindling profits from refinances could push lenders to take on more risk and open up credit from its current historic heights.