Low Inventory Is Good News for New Construction Real Estate 

The trend in 2023 has been clear: there are simply not enough houses to go around. So, what’s a homebuyer to do? For many home buyers, the answer is becoming crystal clear: new construction real estate. And it seems like homebuilders are banking on this, as new permit activity has surged in metros nationwide. Based on US Census data, new construction sales are up 32% for the year.

New construction market data measures growth

The data analysis is not cut and dry, as it usually takes a month or two for the data reports to be verified by experts. Additionally, new construction figures are measured in:

• New permits (the intent to build)
• Housing starts (construction breaks ground)
• New home sales (a new build goes under contract). 

The first measure indicates new home construction to come, so it can both reflect builder confidence and future new construction activity 8-12 months later. Housing starts also show builder confidence, while the new home sales reflect more current market activity. 

The current early indications are homebuilder confidence is increasing despite high mortgage rates and the challenges from labor shortages and supply costs.

In May 2023, the US Census released its new construction update, showing the pace was up 16% from the prior month. This laughed in the face of experts, who forecasted a drop in new construction. That figure included single-family and multifamily homes. 

And the sale of newly built homes was also up month-over-month and year-over-year. As of the US Census August 2023 release, new-home sales were up 6% from August 2022.

Interest in new homes is mostly increasing

The path for new construction hasn’t been a straightforward upward trajectory; new home starts dropped again in June 2023. 

But with each passing month that the local housing markets continue to grapple with low inventory, the interest in alternatives to becoming a homeowner rises. In July 2023, new home sales were back up 4.4%. New permits rose about 7% in August, signaling activity to come.

Existing homes can’t meet housing demand 

What is driving the interest in new construction real estate is very clear. People are not interested in selling existing real estate because mortgage rates are 4% higher than they may be carrying. 

It’s why there were roughly 26% fewer new listings in June 2023 compared to a year ago. Having 1.1 million existing homes for sale in July 2023 may sound like a lot, but that’s half what it was when the pandemic kicked in.

As long as these elevated interest rates and higher housing prices stick around, so will the reduced inventory. 

But that doesn’t help the large number of homebuyers who have delayed buying a home or must move for work or family reasons.  

So, new construction is filling in the gaps in the housing shortage. Around one-third of all new active listings nationwide in May 2023 were new construction homes.

Where new construction is most popular

It shouldn’t be a coincidence that some markets with the highest population increases are also those seeing an uptick in new construction. In one analysis, the top three markets are out in Texas: Dallas, Houston, and San Antonio. However, Orlando is another market with a high interest in new construction housing. In this central Florida city, average home prices grew 58% from before the pandemic.

New construction is also becoming affordable

Another lure for new construction homes is that their prices are coming down. Existing home prices continue to appreciate. In places like Sarasota, they’re near record highs. Meanwhile, the cost of a new construction home was at a median $430,000 in August 2023. That’s almost comparable to existing real estate, with the nationwide single-family home sales price at $413,500. 

Will new construction stay attractive?

Still, some home builders remain cautious about what the future holds. The Commerce Department reported home builder confidence was at a five-month low in September 2023. Starts for new housing pulled back, particularly in the multifamily segment. Builders still had incentives on the table to convince buyers to make the plunge into new construction. These include mortgage rate buy-downs to make owning a new home more affordable. 

But for as long as the existing inventory is low, new construction will remain an option for home buyers who are running out of patience in their search for a home. That is likely to drive market demand.