Housing market inventory is so scarce that builders will be in the driver's seat for years to come, says KB Home's CEO

There’s no doubt about it: Homebuilders have exceeded expectations this year. Take, for example, KB Home, which recorded net home sales of 3,936 in the three-month period ending on May 31. This performance was in line with the 3,914 homes it sold during the same three-month window in 2022—a period that was also before mortgage rates surpassed 5.5%.

In a recent interview with Fortune, KB Home CEO Jeffrey Mezger expressed his optimism about the homebuilding industry’s prospects, attributing it to the chronic shortage of existing and resale housing inventory. Mezger thinks that lack of inventory spells years of opportunity for homebuilders.

“I shared it on our last earnings call: Once we, quote, ‘found the market’ and got our sales pace back [in early 2023], we’ve been raising [home] prices across the footprint and in the second quarter reported that we raised prices in 70% to 75% of our communities during the second quarter. I would say the [house price bottom is in. It’s being caused, if you go macro for a minute, it’s a story that’s true in every city we operate in, there is no [existing] inventory out there,” Mezger tells Fortune.

In a normal and balanced housing market, Mezger says there would be six months of inventory supply—or 2.6 million listings around the county. However, we’re nowhere close to that level.

“Today it [months of supply] is being quoted in months of one month, 1.2 months—so instead of 2.6 million homes to choose from, it’s 500,000 homes. And of that 500,000 listed, a chunk of that isn’t even livable, it’s homes that would have to be acquired and torn down and rebuilt. So the resale stock, which is our biggest competitor, has no inventory. There are markets in our price point that it [months of supply] is instead being quoted in days: 11 days, 12 days of resale supply,” Mezger tells Fortune.

The absence of existing inventory, combined with new home pricing adjustments and incentives offered by builders, is the reason new home sales have rebounded this year, as per Mezger. Indeed, new home sales have increased by 31% on a year-over-year basis, according to the U.S. Census Bureau.

“Our, historically [speaking], biggest competitor doesn’t have any inventory, and on the build side, with all the supply-chain issues and everything we went through, we never caught up. So there is shortage of new homes and resale homes fueling a lack of inventory; at the same time we have strong demographic demand from the millennials, and Gen Z is now hitting homebuying years. So when you have strong [demographic] demand and no inventory, even though rates have moved up, demand is still strong enough that buyers adjust to the [mortgage] rates and sales remain robust,” Mezger tells Fortune.

Mezger is right: There isn't much h o u s i n g inventory for sale.

According to Realtor.com, there were 46% fewer active home listings in August 2023 compared to August 2019. This astonishing drop in inventory has been a defining feature of the post-pandemic housing market, pushing supply and demand dynamics into uncharted territory.

Remarkably, among the nation's 100 largest housing markets, only Austin has successfully returned to pre-pandemic inventory levels. Conversely, places like Hartford, Conn., have experienced a jaw-dropping 70% decline in available housing units for purchase.

The scarcity of existing inventory has also prevented a steep national home price decline, despite the historic challenges to housing affordability resulting from a sharp rise in mortgage rates—from 3% to over 7%—since 2021.