After months of slowdown in the wake of weaker buyer demand, homebuilders are starting to pick back up on construction — and feeling more confident about the housing market since mortgage rates surged last year.
Privately-owned housing starts in May were at a seasonally adjusted annual rate of 1.63 million, a 21.7% increase from the April estimate of 1.34 million, the U.S. Census Bureau reported this week. Meanwhile, privately owned housing units authorized by building permits last month were at a seasonally adjusted annual rate of 1.49 million, 5.2% higher than in April but 12.7% less than the May 2022 rate.
The jump in home starts observed last month is notable, said Kelly Mangold, a principal at RCLCO Real Estate Consulting.
“There’s such a low level of inventory on the market (and) so many people are locked into very low interest rates, which makes new homes one of the more available options in a lot of markets,” Mangold said.
Major homebuilders like Miami-based Lennar Corp. (NYSE: LEN) are expecting to build more homes this year than originally anticipated. Stuart Miller, the company’s executive chairman, said during the builder’s earnings call the housing supply shortage continues and also noted supply-chain issues and construction costs have abated since the depths of the Covid-19 pandemic.
A monthly pulse check of the homebuilding industry suggests greater optimism, too. The National Association of Home Builders/Wells Fargo Housing Market Index, a monthly survey of NAHB members that measures present single-family home sales, single-family sales for the next six months and traffic of prospective buyers, found improvement on all three metrics for its June 2023 index. All index measurements were lower than where they were a year ago, though.
George Ratiu, chief economist at Keeping Current Matters, said the turnaround in new home construction recently is very surprising, since sharp increases in mortgage rates last year saw many buyers walking away from their contracts. It wasn’t uncommon for builders to offer concessions, rate buydowns and even sell entire portfolios of homes to investors.
“All of a sudden, after six months in which the predictions for the housing market were quite dire and many were forecasting sharp drops in prices because mortgage rates were going to drive the housing market into a downward spiral … January, February was when we saw signals that something was different about this market,” Ratiu said. “Instead of buyers running away, they started to try to walk forward and figure out how to make deals happen.”
Mortgage rates remain volatile but are moving up and down less dramatically than they did in the second part of 2022, with rates hovering between 6% and 7% for some time now, giving buyers more confidence about what they can afford.
Builders are feeling bullish on the fact that buying demand hasn’t completely evaporated, despite those big jumps in mortgage rates, while existing inventory of homes for sale remains extremely constrained, Ratiu said.
“In some markets around the country, we’ve seen the return of multiple offers on certain existing homes,” he added.
Nicole Bachaud, senior economist at Zillow Group Inc. (Nasdaq: ZG), also in a statement said low inventory of existing homes available for sale has pushed many buyers who can afford to shop for homes to look at new construction.
New single-family home sales in April were at a seasonally adjusted annual rate of 683,000, according to the Census Bureau and the U.S. Department of Housing and Urban Development, a 4.1% increase from the March rate and 11.8% higher than the April 2022 estimate of 611,000. That growth in new home sales has helped raised builder confidences from lows seen in the past year, Bachaud added.
Looking at the overall market, the number of homes for sale nationally fell 7.1% year over year, to 1.4 million on a seasonally adjusted basis, in May, according to Redfin Corp. (Nasdaq: RDFN), the first annual decline since April 2022.
As builders look at their current and future pipelines, there’s been somewhat of a shift away from the upper segment of the market — the move-up buyer or luxury housing market, for example — to more affordable options, although first-time buyers may still be hard pressed to find entry-level-priced new construction, both Ratiu and Mangold said.
As of the first quarter of 2023, the average size of a single-family home was 2,469 square feet, according to the NAHB, smaller than the average size of homes in 2021 and 2022. Builders are being more cognizant of what buyers can afford and are building smaller homes to offer somewhat lower prices, Ratiu said.
Still, the economics of land pricing and other factors means a good share of the new-construction housing market is move-up buyers, Mangold said. But any inventory added to the market trickles down, such as unlocking existing homes for the first-time homebuyer when move-up buyers purchase new homes, she added.
“Movement in the market is certainly better than the alternative of building nothing,” Mangold said.
One factor worth watching is the impact Canadian wildfires may have on lumber prices, with lumber futures at $536.50 per thousand board feet as of Wednesday morning. That’s up from a six-month low of $469 per thousand board feet seen in January. Construction costs make up about 60% of a final home price, Ratiu said, so fewer surges in construction costs — aside from the wildfires — have given builders more breathing room overall.
By Ashley Fahey – Editor, The National Observer: Real Estate Edition, The Business Journals