It’s possible the starter home construction market may see some relief in coming months but change won’t come fast and competition from buyers will remain stiff. The good news is that new construction of starter homes is likely to pick up in coming months as the upscale markets soften. It will be a month or so before official numbers are tallied and released. However, there are pockets of reports across the US that bidding wars for mid to upscale homes have become rare. Also, the hottest markets like Seattle haven’t seen average price increases for several months. In fact, places like Seattle have seen a few months of average price reductions.
Although these are $1 million plus homes, these are not McMansions. These are midsize and above average quality homes that are generating less interest from buyers. These are the types of houses that have seen the most new construction for several years. Higher profits from limited land availability in major markets have made mid to upscale homes the preference for builders.
Interest rates are a driving factor in slowing the mid-range market. The July Federal Reserve interest rate drop helped sustain the mid-range summer market. However, the demand side of this market has become mostly satisfied over the last several years. Remaining buyers are becoming pickier. Sellers are no longer able to raise prices just because the calendar month changes.
Future interest rate reductions will likely be based on a weakening global economy, trade wars, and most specifically the reduction in GDP growth from 3.1% in the first quarter to 2.0% in the second quarter. There has also been a meaningful weakening of growth in personal income this summer. The economic numbers are likely to drive mortgage refinancing in the mid-range sector rather than higher demand from buyers. New additions and upgrades are a safer choice for existing homeowners as the economy becomes uncertain.
But this opens the possibility for new construction in the starter home sector. The demand for starter homes has not gone away. There are still economic indicators for growth here. An August survey by Fannie Mae found that consumers do believe interest rates will fall further. Lower interest rate will help cash strapped first timer buyers. However, the picture isn’t entirely rosy for first time buyers although it does look strong for builders.
Millennials, as first time buyers, are still carrying a huge college debt making it difficult to qualify for a mortgage because of their debt-to-income ratio. Lower interest rate will help lower that ratio. But there is still a pent up demand from investors wanting more entry level homes. Strong demand from both first time buyers and investors will continue keeping prices at historic highs for months to come. Builders can be expected to take advantage of this shifting market to keep their highly sought after workforce fully employed heading into the slower fall and winter construction seasons.
Overall, the residential real estate market should be expected to slow in coming months (on a seasonally adjusted basis). Although price increases have slowed, they remain too high for many first time buyers. Some builders are already existing the market or slowing down building rather than shift to lower profit starter homes. The supply of newly built homes for sale fell 1% in the second quarter, the first annual drop in six years, according to Redfin. Lower interest rates will help sustain demand but the lower interest rates are being driven by a slowing national and global economy. There are few, if any, indicators that the residential market will strengthen any time soon.
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