You surely didn’t “hear it here first,” but you’ve certainly heard it here a lot: An acute dearth of resale inventory is driving America’s desperate homebuyers into new construction.
That’s a boon to builders, and they needed it. 2022 was challenging, to put it mildly. Builder sentiment, as measured by the NAHB, fell for a year straight before finally turning a corner in January.
This month, the headline index rose back to 50, according to a Tuesday update. The range of estimates, from nearly three-dozen economists, was 43 to 47.
May’s five-point increase was the fifth in row.
Robert Dietz, NAHB’s chief economist, thanked the same dynamic discussed here on too many occasions to count in recent months.
“Lack of existing inventory continues to drive buyers to new construction,” he said, on the way to citing a remarkable statistic: A third of homes listed for sale are new homes, either completed or under construction. That figure was less than 13% on average in the two decades leading up to the pandemic.
There’s no mystery here: People who own a home are reluctant to sell because, assuming they plan to finance a portion of their next purchase, they’d be trading a low rate for a much higher one. So, builders are stepping into a void left by a lack of existing inventory.
The bad news for buyers is that new construction typically costs more. Robust demand gives builders some scope to start raising prices again, although many are still offering incentives in an attempt to lure buyers discouraged by higher financing costs.
A measure of single-family forward sentiment hit 57, a seven-point jump from April. The local low was 31 in November, just as mortgage rates began to recede from 2022’s highs.
Note that the index now sits at the highest since June, when housing prices peaked.
This situation is at least a little bit tenuous. Much depends on builders’ capacity to secure what they need to complete new homes in a timely fashion, and although supply chains have basically healed, there’s still friction. If demand for new construction continues unabated thanks to the absence of resale inventory, builders may start to run into bottlenecks again.
In addition, anyone trying to get a construction loan from a regional lender is likely to face tougher questions given recent events in the banking sector. That doesn’t mean credit won’t be available, but it does mean standards will be tighter. Note: That applies both on the builder side and the buyer side. If you’re a buyer, and you don’t want to be railroaded into some cheap spec community or nightmarish tract build, you’ll need a construction loan. The process for that is different than it is for a conventional mortgage, and rates are typically a bit higher.
Dietz summed it up. “With limited available housing inventory, new construction will continue to be a significant part of prospective buyers’ search in the quarters ahead,” he said Tuesday.
A 6%+ mortgage rate would usually translate into buyers needing 6% rate of appreciation for a purchase to make sense. If you project nominal gdp to grow 4-5% that suggests that this rate is restraining the housing market. As this article points out, there is a supply problem as well. The housing market is clearly out of balance.
H man , I hope you take this article to heart and decide to build your own fortress (house).
I accept the logic of the NAHB econ guy that people are staying put and not selling but who is buying? Our population growth is near zero. Where is the demand coming from? Something just doesn’t add up.
Millenials are the largest generation in the US and are at that age where they want to buy a house. Also, population growth has certainly slowed, but still growing. Add investors to the equation and you’ve still got more than enough demand to keep prices buoyant.
The Fed should dump its MBS holdings — biggest social welfare program ever whose biggest beneficiaries are Wall St. banks and comfortable to super-affluent Americans..