New Construction Buoys Bare Spring Real Estate Market

Home buyers flock to new builds in an effort to find more options amid persistently low inventory.

More buyers are deciding to build a new home because they can’t find an existing property in the current low-inventory environment, and the increased demand is prompting home construction to ramp up. The new-home market is experiencing a strong turnaround after a sluggish fall and winter, and builders are feeling more optimistic as new homes make up a greater portion of listings this spring.

In March, 33% of listings nationwide were new homes in various stages of construction, according to data from the National Association of Home Builders. For comparison, the average for new-home listings was about 13% from 2000 to 2019. “With limited available housing inventory, new construction will continue to be a significant part of prospective buyers’ search in the quarters ahead,” says NAHB Chief Economist Robert Dietz.

Builders acknowledge plenty of headwinds, including a persistent labor shortage and hikes in the cost of building materials, but they’re encouraged by an upswing in buyer traffic to new-home sites and believe buyers will continue to flock to new construction. “New-home construction is taking on an increased role in the marketplace because many homeowners with loans well below current mortgage rates are electing to stay put, and this is keeping the supply of existing homes at a very low level,” says Alicia Huey, chairperson of the NAHB.

Indeed, many current homeowners locked in low mortgage rates over the last few years, as 85% of borrowers are financed with a mortgage rate below 5%. Averages for mortgage rates last week were just below 6.5%.

Builders Are Offering Deals to Attract Buyers

With mortgage rates significantly higher than just two years ago, builder incentives are playing a key role in attracting buyers to new-home construction, builders say. Fifty-four percent of builders offered some type of incentive to bolster sales in May, according to NAHB data. Those builder incentives included reducing mortgage payments, covering closing costs, and mortgage rate buydowns. Twenty-seven percent of builders say they dropped their prices in May, the NAHB notes.

“Builders are more inclined to adjust prices versus resale home sellers to meet the market, drive demand back to their sales offices and move homes off their balance sheet,” writes John Macke, senior research analyst at John Burns Real Estate Consulting. “Incentives, particularly mortgage rate buydowns, remain a key sales advantage over the resale market and should continue with rates still elevated as long as forward commitments purchased by builders remain available and not overly cost-prohibitive.”

Builders Still Cautious

Still, homebuilders are exercising “cautious optimism” about the rebound in new-home sales. A shortage of building materials as well as tightening credit conditions for residential real estate development will continue to impact the new-home market, Huey says.

But even so, single-family housing starts showed gradual improvement in May compared to the beginning of the year, the Commerce Department reported Wednesday. Starts rose 1.6% in April to a seasonally adjusted annual rate of 846,000. (Despite the uptick, starts remaining 28% lower than a year ago.)

Homebuilders are optimistic they can continue to meet buyer demand. “As the Federal Reserve nears the end of its tightening of financial conditions, we expect mortgage rates to moderate in the months ahead, and this will lead to a gradual improvement in single-family production,” Dietz says.