Builders voice concern as new home starts dip by 10% annually

Homebuilders say they’re becoming concerned that increasing numbers of buyers are pulling out of sales contracts for new homes. That’s led to homebuilder confidence falling for the eighth month in a row, according to the Commerce Department this week.

Last month, single-family home construction dropped by 10% annually, falling to its lowest level since the beginning of the COVID-19 pandemic.

This year has seen a big slump in buyer demand for new homes. Builders say rising interest rates and the increased cost of building materials are the primary factors behind this. Since January 2020, the average cost to build a new home has risen by 35.7%, and those expenses are typically passed onto buyers. In addition, some construction projects have been delayed by supply chain issues, while inflation is only making things worse.

National Association of Home Builders Chairman Jerry Konter said what we’re seeing is a “housing recession”. He explained that one in five home builders have reduced their asking prices in the last month in an effort to boost sales and stop buyers from canceling their contracts. Despite these efforts, single-family housing starts are expected to decline this year compared to a year earlier, which would be the first time they have decreased since 2011.

There could be some relief on the horizon, with some economists saying they’re seeing signs that inflation is peaking and mortgage rates are stabilizing. National Association of Realtors Chief Economist Lawrence Yun says the persistent shortage of homes should ensure that demand from buyers remains elevated over the long term.

“Homebuilders are naturally very cautious about rising unsold inventory during the construction phase,” Yun told RealtorMag. “But those completed homes are finding buyers within three months, which is relatively swift for the new-home market. Improving conditions within the supply chain for the delivery of items such as lumber and appliances will lessen overall uncertainty.”

Builders would also be helped by lower mortgage rates, and Yun believes this might happen. “If mortgage rates remain near 5%—after reaching 6% in early June—there could be renewed buyer activity and additional inventory declines,” he said.

There is a bright spot for builders in the multifamily home market, which covers apartment buildings and condominiums. Although multifamily construction starts fell slightly in July, Yun said this was likely due to the common month-to-month volatility of the sector, as opposed to a longer term trend. He said multifamily construction is actually on target to hit its highest level in over 30 years in 2022.

“Rapidly rising rents are economic incentives for building rental housing,” Yun explained.