New-home construction continued to be constrained in February as the costs of building materials remained high. At the same time, rising mortgage rates and new economic fears about the banking sector are shrinking the pool of potential buyers. Yet home builders are feeling upbeat.
Builder confidence in newly built single-family homes rose for the third consecutive month in March, according to the National Association of Home Builders and Wells Fargo Housing Market Index. Builders say they believe a lack of existing housing inventory will shift homebuyer demand to the new-home market. “A significant amount of housing demand exists on the sidelines,” says NAHB Chairperson Alicia Huey. “Even as builders continue to deal with stubbornly high construction costs and material supply chain disruptions, they report strong pent-up demand as buyers wait for interest rates to drop.”
Last month, single-family home construction posted a modest 1.1% gain on a seasonally adjusted annual basis. But construction is down nearly 32% compared to a year ago, the Department of Housing and Urban Development and the Census Bureau reported Thursday. Builders have tapped the brakes amid surging mortgage rates, which are nearly double what they were a year ago.
However, rising builder confidence signals a potentially sharper turning point for home building later this year, says NAHB Chief Economist Robert Dietz. “We expect volatility in the months ahead as ongoing challenges related to construction material costs and availability continue to act as headwinds on the housing sector,” he says. “However, interest rates are expected to stabilize and move lower in the coming months, and this should lead to a sustained rebound for single-family starts in the latter part of 2023.”
But the latest wild card: jitters over the nation’s financial system after the recent collapse of three banks. But that could reduce long-term interest rates, which “will help housing demand in the coming weeks,” Dietz says. “The cost and availability of housing inventory remains a critical constraint for prospective home buyers.”
Only 830,000 single-family units were started in February, which is well below the historical average of 1 million units—a threshold often cited to meet population growth. “It is understandable, given high mortgage rates, for home builders to be cautious,” Yun says. “However, once rents and consumer price inflation calm down, mortgage rates will be lower.” Though that will likely bring more buyers to the market, it remains to be seen whether there will be enough inventory to satisfy demand, he adds.
Existing inventory remained low in January at a 2.9-month supply but has inched up by 15.3% compared to a year ago, according to NAR data.
Home builders are trying to get buyers’ attention: Thirty-one percent say they reduced their prices in March, while 58% say they provided some type of incentive, such as a mortgage rate buydown, according to NAHB data. The trade group attributes the increase in new-home sales over the last two months to the increased use of incentives and price discounts.
Meanwhile, multifamily starts are a notable bright spot for the new-home sector, climbing 24% in February to an annualized 620,000-unit pace, HUD and the Census Bureau report. More is on the way, too: Multifamily permits in February rose 21% on an annualized basis.
“The market is responding to solid rent growth and low vacancy rates of both apartments and single-family rental units. But with such active construction, plenty of empty units will be hitting the market throughout this year and next,” Yun says. “Rents will calm down and even drive the overall consumer price inflation to be manageable.”
“Shelter” makes up one of the largest components of the Consumer Price Index, which largely is measured by rent costs, and has been cited as a significant contributor to sky-high inflation in recent months.