Builders worried about sudden decline in new home market

Builders say more buyers are forgoing new home sales contracts as traffic plummets, driving homebuilder confidence down for the eighth straight month, the Commerce Department reported Tuesday. . Construction of single-family homes last month fell 10% a year, matching the lowest level since the COVID-19 pandemic began in 2020, the data showed.

There has been a dramatic decline in demand from home buyers this year, which builders attribute to rising mortgage rates and material prices. The average cost to build a new home has jumped 35.7% since January 2020 — an expense that is passed on to buyers — according to the Commerce Department. Ongoing supply chain issues are also delaying construction projects, and inflation is adding to homebuyers’ angst.

Jerry Konter, president of the National Association of Home Builders, calls the current market a “housing recession.” About one in five homebuilders said they cut prices in the past month to boost sales and limit the number of buyers canceling contracts, according to NAHB data. Single-family housing starts are expected to post a decline in 2022, which would mark the first decline since 2011, says NAHB chief economist Robert Dietz.

Hope on the horizon?

At the same time, there are growing signs that inflation is peaking and long-term mortgage rates are stabilizing. Lawrence Yun, chief economist for the National Association of REALTORS®, says the ongoing housing shortage is expected to keep buyer demand high across all real estate sectors over the long term. “Home builders are understandably very cautious about increasing unsold inventory during the construction phase,” Yun says. “But these completed homes find buyers within three months, which is relatively quick for the new-build market. Improving conditions within the supply chain for the delivery of items such as wood and appliances will reduce overall uncertainty.

Lower mortgage rates in the near future could also help. “If mortgage rates stay close to 5%, after hitting 6% in early June, there could be renewed buyer activity and further decline in inventory,” Yun said.

Meanwhile, the multifamily market, which includes apartment buildings and condos, continues to be a beacon of hope for housing. Although multi-family housing starts dipped slightly in July, Yun brushed off the decline as a reflection of month-to-month volatility rather than a long-term trend. Indeed, multi-family construction activity is on track to hit its highest level in more than 30 years, Yun said. “Rapidly rising rents are an economic incentive to build rental housing,” he adds.