Warning: Construction is Going Soft (& What to Do About It)
By: Charles Sells
The new-construction market is softening, and builders are opting to reduce their prices in hopes of getting ahead of the trend. In a report from the U.S. Census Bureau released at the end of July, single-family construction in June fell to its lowest levels since April 2020, the month after COVID-19 lockdowns commenced in the United States. The report also indicated housing permit volumes are falling, which analysts say tends to herald declines in single-family construction.
In addition to this information, John Burns Real Estate Consulting announced builder sentiment is falling as well, posting a stark June drop second only to the measure from April 2020. Builders say they are worried about slowing buyer traffic, decreasing sales volumes, and falling home prices. Builders are also expressing fear that buyers have been priced out of the market.
According to National Association of Home Builders chief economist Robert Dietz, this softening in new-home construction should “send a strong signal to the Federal Reserve that tighter financial conditions are producing a housing downturn.” The Fed has been raising interest rates by leaps and bounds in an effort to stop inflation in the post-pandemic economy, but many economists say that the end result will be a difficult housing correction. As rates rise, homebuyers are canceling contracts because they can no longer afford the new interest rates that they will have to take on in order to purchase a property.
“As the completion of construction has taken longer, the home now requires financing at a much higher mortgage rate,” explained Lawrence Yun of the National Association of Realtors.
For real estate investors, the softening in the new-home market means that the time is approaching when you may be able to acquire new properties at a discount, but do not be too hasty. Remember that a discount in today’s market is likely discounted from an artificially high price tag thanks to the intense demand generated by the COVID-19 pandemic. Furthermore, since supply-chain disruptions in many parts of the country are ongoing, investing in unfinished homes may create an unwelcome scenario in which you now own a non-cash-flowing asset that you can neither convert to cash-flowing nor sell for a profit.
Fortunately, although new construction may be entering a tough phase, CoreLogic reported at the same time that the rental market is “a bright spot” in the correcting real estate sector for both new construction and existing assets. In May 2022, single-family rental growth hit record highs (again).
“Increases in mortgage rates and home prices can be headwinds to the for-sale housing market but may be continually pushing up single-family rents,” explained CoreLogic economist Molly Boesel.