As builders struggle to keep up with demand, outlook is good for new home suppliers
By Joe Higgins, Quest 4 Quality
- New single-family home sales rose 12.3% month over month in May
- In June, single-family housing starts were down 7.1%, after an 18.9% increase in May
- Existing home sales fell 3.3% in June, the slowest pace since the start of the year
The housing market has been in flux for more than a year. When the Federal Reserve first began raising interest rates, it seemed like it would be the death knell for home builders. Mortgage rates quickly doubled from 3% to 6%, then rose to 7.2%. Home builders in turn laid off construction workers and cut back on building as there were few buyers for new or existing homes.
It did not take long for housing to make a comeback. New home sales dramatically improved in April and May, even though mortgage rates had not changed. New single-family home sales rose 12.3% month over month in May, which was their highest level since January of last year.
In June, single-family housing starts were down 7.1%, after an 18.9% increase in May. Permits for future production of single-family homes increased by 2.2%, a 12-month high. May’s jump in starts completely overshadowed the June number, but combined over two months, it offers a strong direction for new housing in the second half. Starts are now at a 10-month high.
Existing home sales fell 3.3% in June, the slowest pace since the start of the year. Given the lack of existing homes and the current interest rates, this was expected.
It is this critical shortage of existing homes has changed the market for new homes. There are two problems with housing today. First, most current homeowners are staying put because they locked in loans close to the old rate of 3%. Now they cannot afford to buy an upgraded, more expensive home with a mortgage between 6% and 7%. Second, the construction of new homes has not met the demand. Current inventory in many markets has fallen to the lowest levels in U.S. history. At the end of June, less than 1 million existing homes were either pending or sold.
That makes new construction the logical choice for families desperate to find a place to live. In June of 2023, new housing accounted for 42% of all home sales across America. That marked a significant change as the highest percentage of new homes in past years was 22%. Consumers jumped at the chance to buy a new home and eschewed existing homes as their sales fell by nearly 18%.
This is not necessarily a solution to the massive housing shortage problem, which shows no signs of improvement as far out as 2024. While the multi-family construction business has been off the charts the past two years, builders have not made a dent in the number of new units needed to house the large population of millennials.
The other problem for builders trying to meet the demand for new homes is the shortage of products like cabinets, garage doors, electrical equipment and labor. Also, as interest rates rise, so does the cost of construction loans, which slows down production.
I believe if we can stay out of any severe economic downturn and if employment continues to grow and wages hold up, single-family starts could reach 1.1 million units by the end of 2023. According to the NAHB, confidence among America’s home builders increased in July 2023 to 56, from June’s index of 55, marking its highest point since June 2022.
Where I live in Washington state, the increase in interest rates and the impact on mortgages has virtually stopped home purchases; the affordability rate (how many consumers could afford to buy a home) was less than 30%. In Northern California, that rate was 17%, so most consumers could not afford a new home and could not find an existing home. The current national average rate for a 30-year mortgage is 6.78%.
In a twist, home builders are going after customers with financing deals that offer better mortgage rates. The average buy-down rate this past month was 1.2%, lowering the monthly payment and making the sale more attractive to consumers. Most builders only offer this for the first year or two and not the life of the loan.
Bottom Line
In my opinion, the housing industry will continue to see strength in the growth of permits. The economy should continue to expand in the second half of 2023, and housing starts could reach slightly over 1.1 million units — all made possible by the severe shortage of existing homes.
No industry is as affected by a rapid rise in interest rates as home building. The Fed has raised interest rates by 500 basis points in the past 16 months; this increase alone has muted growth in housing. The Fed raised interest rates by another 25 basis points at its meeting on Wednesday, raising the benchmark rate to its highest level in 22 years. This could be yet another blow to an industry just coming out of the hole.
Joe Higgins is a 46-year veteran of GE and Whirlpool Corp. who brings his executive experience to bear as a business consultant, AVB keynoter and YSN contributor. Visit his website, Quest 4 Quality with Joe, at www.q4qwithjoe.com.
