For the first time in a long time, first-time homebuyers are essentially being priced out of the housing market entirely. Anyone who owns a home isn’t selling, interests are more than twice what they were three years ago, and inventory is super low (which means competition and prices are much higher). Finding a comfortable place to call home has been nearly impossible for most buyers.
The silver lining and potential salvation for people hard-pressed to become homebuyers: new construction homes. The latest data suggests that the rate of groundbreakings has risen substantially in recent years, as well as some other indications that more houses might be coming soon. Construction companies are selling their homes quicker and seeming more hopeful; history shows this usually indicates when they will begin laying more new housing foundations. Even renters could benefit from a historic number of apartments and complexes being built this year.
With most homeowners unwilling to sell their homes, prospective buyers will depend more on new construction (including manufactured housing). In addition, builders are giving buyers a choice in finding alternative housing options in an effort to slow demand for homes that are already in the market. Looking at the new houses for sale market, it’s clear that contractors and developers are doing everything they can to show potential buyers that new construction is a desirable avenue for those beaten back by the inventory shortages nationwide. Many builders even offer incentives like lower interest rates and other reductions to alleviate the burden of higher mortgage rates. Some potential buyers are interested in this. An economist recently reported that building new homes is “the last opportunity in town” and should be taken advantage of.
Even though the outline of this construction boom isn’t crystal clear just yet, analysts are intrigued as they wait for new data, and builders are continuing to fight higher interest rates and a labor shortage. The homebuilding industry is usually a cycle-driven industry that is influenced by the fluctuations of the overall residential market. The devastation from the Great Recession (2008-2010) continues to loom big in the eyes of home builders. Moreover, new construction fell when the Federal Reserve began hiking interest rates this spring. That said, the trend reverses if potential sellers can get their feet wet and potential buyers consider looking beyond their existing selection of houses. If the builders keep gaining confidence in the buyers’ market, it could expedite the ongoing battle to combat the housing crisis in America.
There’s Been A Boom In New Construction
The Census published its update for May regarding new construction of homes late this month; the numbers stunned even the most committed experts on housing. New homes being built increased dramatically, reaching 1.56 million units, an increase of 16% over the month prior and well over the -0.1 percentage drop that experts predicted. To put this into perspective, new construction laid more foundations for homes than each month before June last year, when mortgage rates began slowing down the housing market. This increase was accompanied by a month-over-month rise for homes with a single family, which are up 18.7 percentage points in a year-on-year rate greater than 1 million. The same was true for multifamily homes, up 11.5 percent during the same time frame. The sales of new houses in May were also at an all-time high rate of 763,000. This is about 11% higher than April’s number and up 20 percent compared to a year earlier.
“It was an incredible shock, from my point of view, in terms of residential construction and homes sold,” Richard de Chazal, the macro analyst at William Blair, told sources. “That was a sign that the economy, as I envisioned, would only remain weaker.”
Most of the time, sales for the newly built and older residences go in the same direction as the rest of the market. However, the shock of increased mortgage rates and the huge disturbances during the pandemic have resulted in the two figures going in opposite directions, which is contrary to the trend. According to the National Association of Realtors, pending home sales decreased by 2.7 percent from the previous month and 22% less than the previous year.
Then, in June, around 26% fewer properties were on the market than last year, Realtor.com noted. The new construction market, however, was responsible for almost three-quarters of open listings in May, a rise from 16% during May of 2019, according to Redfin. Sales of new homes have been on the rise over the past seven months, following a dip in the fall of 2018 as per a survey of construction home builders conducted by John Burns Research and Consulting, an industry-leading housing consulting and research firm.
Construction firms averaged 23% more homes sold last month than average for June between 2013 and 2019.
The difference in the number of home sales indicates the stubbornly excessive mortgage rates that have nearly doubled in the last year and a half. The average interest rate for the 30-year loan is close to 7.7%. Homeowners who purchased homes prior to 2022 aren’t compelled to relocate because that could force them into giving meager rates, which assure them of a manageable payment over the long haul. Around 85 percent of homeowners in May were paying an interest of 5% or less, and around half were paying 3.5 percent or less, in the opinion of Black Knight, a provider of mortgage data and technology.
“The existing home market has been in a state of halt, so anybody wanting to purchase homes is being required to go into the new market to access the supply,” de Chazal told sources. “So it’s the reason why there’s a shift in new-home sales upwards while existing home sales remain quite weak.”
Existing Homes For Sale Market May Stay Cool
Naturally, people inevitably relocate for reasons unrelated to the mortgage rate. The current shortage of buyers has “obvious advantages” to home builders, Mike Simonsen, the vice president at Altos Research, told sources.
“There’s not a single indication from the statistics that there’s an upswing in houses coming on the market,” Simonsen said. “So it’s going to be good for the construction of new homes as the homeowners who live in the US are enjoying a fantastic deal and are unlikely ever to sell their homes.”
Builders also have an advantage when it comes to homeowners who have to sell due to a variety of reasons. The companies can attract prospective buyers with special deals such as rate buydowns, where the builder is paid to reduce the mortgage interest throughout the term of the loan or during the initial years. For a home worth $450,000, which is the median selling price in the Census, the buyer who puts 20% down could save up to $85,000 during a 30-year mortgage when their interest rate was only one percent lower than the currently-priced rate.
Around 56% of construction companies gave incentives for buyers in June, according to data from the National Association of Homebuilders, an increase from 54% in May. Since the NAHB began conducting surveys on builders’ incentives in 1995, the proportion of builders offering such sweeteners was always at least 50% until July 20, 2022, which was 43%. Incentives have increased from then on, though it’s far from the record peak of 86% that was recorded in December 2008. Most homeowners aren’t enticed to pay the cash for the purchase of a mortgage because they know there’s always a large number of buyers eager to buy houses when they go on the market and are eager to shell out large sums of money to purchase these homes. However, those that offer incentives are able to gain when it comes to the marketplace.
“Builders are more in control of the interest rates on the mortgage they provide to buyers of homes, which means they can offer lower payments today than what you could get from the current market. The mortgages appear to be more affordable,” Simonsen told sources. “As a result, you can tell builders thinking, “Well, let’s build more than. This gives us control and a benefit.'”
While builders will have a much easier time than other builders in making these deals work, typical homeowners probably won’t feel that they need to provide similar offers since their homes continue to receive many offers and quickly sell in the face of a shortage of inventory, Sheryl Palmer, the chief executive officer of the homebuilder national Taylor Morrison, told sources.
“Most crucially, we’re not getting enough,” Palmer said. “And this has been made worse by what’s being called the “lock-in result that is a result of the resales market.”
Make No Mistake – Builders Are Building
The benefits are beginning to cause homebuilders to look more optimistic about the prospects for their business. Sure, a quarter of builders told the NAHB last month that they had cut prices to boost sales — but that’s down from 36% in November, the most recent peak. The supply chain issues have improved, as well as a labor shortage, but the construction industry nonetheless added a record number of jobs in the last year. When you look at the surveys on homeowner sentiment, it’s apparent that the optimism level is increasing. The NAHB’s monthly gauge of optimism among homebuilders rose to 55 from 100 in June. This continues the upward trend that started after a dip of 31 in December. Anything above 49 indicates a positive reading for the index, which can range from 0 up to 100.
“People are being forced to look at new construction projects,” Cristian deRitis, the deputy chief economist at Moody’s Analytics, told sources in May midway through. “Sometimes, this is the only option that’s going on in the town.”
Add An Asterisk To Any Optimism In Real Estate For Now
The experts I talked to warned me to be more relaxed about one month’s figures in particular, as the Census estimations of housing beginnings are usually revised following their publication. The report released on Wednesday revealed that the pace of starts to homes in May was slightly lower than originally anticipated but still a robust 1.56 million units rather than 1.63 million. 1.63 million. The reason for this was an adjustment downward in the number of multifamily start-ups as private analysts and developers like Jay Parsons, the head of the economics department at the real estate software firm RealPage, expected.
Initial Census data for June indicate that the pace of construction has slowed from higher levels in May, with the speed of beginnings dropping to a rate of 1.43 million. However, despite the one-month cooling off, construction continues to rise. “Despite the reversal that occurred during June, residential launches are increasing by 7 percent from January.
Similar to permits, they are up 6.3 percent during the same time. This report suggests a steadying of the market for housing,” JPMorgan senior economist Murat Tasci wrote in an email to customers following the publication. Another report suggests a brighter prospects for construction. The number of permits for housing given out — an indication of houses that were granted construction permits but haven’t yet been begun — rose to a fifth consecutive month in June. It reached its highest point in a year. As per John Burns’ homebuilding survey, the average of production builders was 3.5 beginnings of single-family homes in each community during June. This was a 7 percent growth year-over-year and a 17% increase over the average of June from 2013 through the year 2019.
While buyers might receive some relief from building new homes, the developers are some way from being able to fill the housing gap. In the year 2020, at the time of its end, Freddie Mac put the number of homes in need to 3.8 million units. However, the latest report by Realtor.com put that gap to be 2.3 million units. The number of new housing units would have to grow by 50% over the rate of 2022 to fill in the gap in two to three years, according to the report. It’s not an easy task in light of the fact that homebuilders drastically reduced their production in the aftermath of the financial crisis that hit the world. Between 2010 and 2019, builders built around 21,000 single-family homes for 1 million residents each year. That’s just half the amount that they had built throughout the prior three periods.
The population is turning towards the construction of new buildings.
“It is encouraging to see that builders have increased production. However, the demand from the new construction process takes time and will never be sufficient,” Lawrence Yun, the chief economist at the National Association of Realtors, stated in a statement released with the study on house sales.
Builders are currently on “a little bit of a transition point,” Matthew Walsh, an economist at Moody’s Analytics, told sources. In addition, they’re encouraged by the shortage of houses for sale, hampered by higher rates of interest as well as labor shortages, and beware of building too much. The demand may be less than it was during the boom years of 2021, but there are signs that the market is improving, which is a positive for the sector.
“I believe that the builders would like to sustain their momentum. Don’t stop the momentum,” Palmer told sources. “Everyone’s looking for that middle ground, and let production be in line with sales. But in the past 18 months, the production has fallen further behind. In my opinion, everybody is trying to find the true sweet spot that is balanced.”
The lack of sales has put the demand for new homes into sharp relief. If homeowners continue to remain at their homes for longer periods of time as they age, we’ll be more dependent on construction in order to fill the space.
