By Douglas Katz – 07/19/2022
The government released data this week pointing to a discernable drop in housing starts, i.e. new construction. The overall reported drop was around 2%. Single family housing starts were more pronounced with a drop of 8.1%. This drop is likely ties to builders waning confidence in the housing market and potential concerns about rates, inflation and buyer confidence. While looked at alone, this is a definite concern for the inventory issues already plaguing the market, but it also means that buyers, especially those purchasing new construction need to add this to their analysis.
If you are looking at new construction or if you are already under contract for new construction, your prospective purchases just got a bit more valuable. The 2008 housing crash was partly due to an overabundance of new homes and rampant speculation. This is the opposite and a real scarcity of homes is the reality. I have read and reported on hopes that construction could help supply catch up to demand. This is less and less a possibility when the supply is curtailed by close to 10%. With rates also predicted to rise, I would not anticipate a shift in builder sentiment. Even if it shifts into a more positive territory, new construction has an inherent delay from breaking ground to completion.
First for those who plunked money down on new construction a bit ago, there is good news and bad. While a jump in value may make you feel awesome as it means that you bought at a discount from the current value, it also means builders are also aware that they can sell for more if the deal falls apart. If your finances are tight and your pre-approval solid, you are likely good and can bask in the shine of a good purchase. If, however, you are tight and there is any peril of your deal falling apart due to loan approval, the story is much different. Higher rates, lower asset values for accounts that you needed for down payment or closing costs and inflation impacting your personal budget could all trip you up. With builders slowing construction and looking to maximize return on that they have already started building or broken ground on, the ability to negotiate and work with them to keep the deal together may be tough. After all, they have buyers likely willing to pay more than you did, so there is little incentive for them to do so.
Those considering buying new construction homes are the flip side of the previous example. As new construction homes – near completion, started or otherwise – become more scarce and the possibility of a great many new homes becomes more and more unlikely in the short-term, prepare for competition for the existing or reduced projected inventory. If purchasing new construction is your goal, you may pay more and feel some of the craziness of the past few years. This is all wrapped up in the inherent uncertainty of completion times with costs of everything and rates going up. So you need to go in with the right frame of mind and expectations for how the deal will go.
As with many of the topics that I cover, this is not meant to create panic amongst either of these groups. Rather, it is meant to help point out the inherent risks and considerations for new construction purchases. While a structurally a home is a home, the acquisition is markedly different. The market can be very fluid and volatile and we are definitely seeing that now. As always, the absolute best thing that you can due is get as educated as possible and hire the right team to help you do the right analysis and make the best decision.