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Real Estate News
Sunday, January 08, 2023

New Construction Is Down For 2023

Construction Plan 2023

New Construction Is Down For 2023

The recent downturn in housing starts and building permits is a cause for concern for home buyers. Over the long term, the shortage of new housing construction means fewer options in terms of housing choices and can lead to higher prices due to limited overall supply.

After a highly active two years during the pandemic, home buyer confidence started to wane in 2022 as buyers faced rising mortgage rates and inflation pressure. This turndown in buying trickled across every area of the market, including new construction starts.

Single-family home construction is down 2.9%

newly constructed home

According to a report released in December by the US Census Bureau and the US Department of Housing and Urban Development (HUD), new residential housing starts declined 0.5% from October to November 2022, continuing a nationwide downward trend that began around July 2022. In particular, single-family housing starts were down 2.9% month-to-month and 10.2% year-over-year. Overall construction spending was up 0.2%, but that included nonresidential and public construction.

Mortgage rate increases and economic inflation increased borrowing costs throughout 2022. As their confidence in the market waned and expenses rose, buyers began to pull back on purchasing all homes. New construction was no exception.

New home contract cancellations rise

Not only were home buyers pushing pause on buying at all, some with existing orders for new construction canceled contracts due to economic pressures. By October 2022, the nationwide cancellation rate was as high as 25.6%, compared to 7.6% the prior year. One major home builder reported a 24% cancellation rate in the third quarter of 2022.

Home builders were first feeling the squeeze during the pandemic era to keep up with demand due to shortages in materials and labor. And with buyer demand at an all-time high, many markets struggled to meet orders fast enough. Some slowed sales just to keep up with the pace.

Home builders see dramatic pivot

Dramatic pivot for home builders

The whole market outlook changed within a few months as mortgage rates exceeded 6% and 7%. The about-face was even steeper than the Great Recession pullback in housing starts. Where single-family housing starts were up 10% year-over-year in early 2022, they dropped 19% in a historically unusually sharp turn.

By August 2022, home builders across the nation were left with too many homes in their inventory as buyers hit the brakes. Waitlists dried up even in high-demand markets like Houston, Texas. The National Association of Home Builders (NAHB) reported sales traffic through offices and websites were at its lowest level since 2012.

Home builders prepare for slow 2023

Building permits are an indicator of future construction. Home builders across the market, including the higher end, reported new orders were down by 17% as early as September. This means future completions will also be down as it takes months to finish a new single-family home.

The NAHB reported 2022 would be the first year to see a decline in single-family housing starts since 2011. Its Chief Executive Officer, Jerry Howard, told Bloomberg that builders are cautious of the anticipated recessionary environment in 2023 and building homes they can’t sell.

Meanwhile, new home prices remain high because of increased costs in labor and materials. High inflation is expected to persist in 2023 even if it stabilizes. Inflation will likely offset any decrease in construction costs, which will keep new construction costs up.

Many home builders must pull back on new construction starts as a response to dropping buyer interest.

Some are carrying larger inventories since they began construction back when the market was in a frenzy. Builders are brainstorming ways to entice home buyers, something they didn’t need to do when 2022 began. The NAHB reported up to 25% of home builders were reducing prices on their existing new construction homes.

The upside to declining construction

Long term impact of new contraction

Still, it’s not all bad news. Not every housing market is seeing dramatic new construction slowdowns. Housing starts in the south and western US were still up month-over-month. Completions of new construction were also up 10.8% in November 2022, an early increase of 9.9%.

As home builders seek ways to lighten the load and make new construction affordable for home buyers, we’re seeing offers like mortgage rate buy-downs or reduced rates for using preferred lenders.

Prices may also cool for new and existing homes. The home buyer incentives combined with stabilizing prices could represent an opportunity for buyers interested in owning a new construction home.

Long-term impacts of new construction

 

Even after the surge in home building during 2020-2022, the nation remains underbuilt. It’s a trend rooted in the last Great Recession, which was the previous cycle with a significant downturn in new construction.

Now the real estate market faces a growing population of young adults entering the homeownership age without enough inventory to meet housing demands. This dynamic of underbuilding coupled with demand risks intensifying the affordability dilemma.

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Preston Guyton