Is new construction going to go in the tank?

Question

With inflation hard upon us, more expected, and with money harder and more expensive to get, do you see a downturn in new residential home building? Seems inevitable, doesn't it?

Jim Paulson · Answer

I am a real estate broker in Boise, Idaho and am seeing a huge shift in builder mentality.  They were making insane profits for a while when they couldn't build fast enough.  Several quit doing pre-sold/custom homes so they could control their materials during supply chain issues and so they could keep raising their prices along the way with our market.  They would list them at top dollar when they were 30 days from completion, sell them in days and create new comps at the higher values along the way.

Some are freaking out that their homes are not selling in a week or less and dropping prices (profit margins) but not to the point any are actually taking a loss (that I know of).

I track online showings and those numbers are still great for my listings here in Boise, but many buyer's are still sitting on the sidelines trying to figure out what to do next.  If they are on the sidelines, price reductions don't matter unless they are super drastic.

Will Barnard · Answer

These questions always get the inevitable difference of opinions, many of which lack foundation and are just guesses. To know if new construction housing will go up or down, you simply need to look at the public data. Across the entire US, housing starts (permits for new construction single family homes only) dropped from April 2022 to May 2022 by 5.5% and May 2022 dropped from previous year (May 2021) by 7.9%. Housing starts dramatically slowed at the start of the pandemic and then rapidly recovered. THe situation now (mostly due to the high inflation and governments attempt to curb it through interest rate hikes) is much different and will likely continue to drop before the "recovery" happens.

So, is new construction going into the tank? Probably not but it is certainly being hit right now and that is a fact! I am certainly not taking on any development deals (for SFR) in this environment and I am sure many others feel the same as we would have a large exposure to potential depreciation while in plan check and then the building process. WIth interest rates continuing to climb and inflation out of control adding to labor and material costs, it makes it very difficult to pencil out (there are always outliers but generally speaking). I think @Scott Trench comments above are correct based on the facts I have in hand - data from US census. The midwest and the west have the largest drops in SFR new construction starts according to the data.

Scott Trench · Answer

I think that is a good bet. I think right now is a terrifying time for all but the most aggressive builders.

A lot of puts and takes in this business. New construction slowing would be a tailwind to prices.

Chris Seveney · Answer

Track new construction starts and permits. One thing we do is we talk to a lot of architects and engineers, as they are on the front end of it. If they start to slow and let people go, you know the contracting space is going to follow.

To answer your question, it is already slowing down. Development deals will be very difficult to be viable based on borrowing rates and construction costs.

Matt M. · Answer

New construction has been absolutely crazy in my area. Houses going up and selling in record time. I’d actually like it to slow up a little bit and maybe bring some quality back to the houses. They’re just junk for $500-750k which is not cheap here.

Manny Vasquez · Answer

In my market, I have already started to see several factors that are indicative of a "new-homes-slow-down", at least temporarily.  These are:

1. Slashing of prices downward.  My "new homes" email list-serve is full of new developments all slashing prices.

2. Builders of new homes have increased the commission to Realtors.  This is done to "incentivize" Realtors into bringing in buyers.  In the last 4-6 months, some builders were paying out less commission as they new their homes would sell regardless.  Now that they must compete with existing homes, they are willing to pay out more commission.

3. Builders have started to offer more incentives to new buyers....in the last 4-6 months, most builders had "zero" incentives as they knew they would sell the home regardless.  Now they are offering one of the following (or a combination in some cases): Free "upgrades" on flooring or other building materials, free appliances, and/or paying for closing costs.

If the market slow downs further, the above examples will be exacerbated.

Dave Skow · Answer

@Bruce Woodruff-  this is  prob  accurate .....probably wont see te  slowdown for several months  as the  builders  working on  existing  inventory and  sales  ....this also  will likely vary from one area to another

Mike Dymski · Answer

I am in the site selection stage of building a hybrid apartment/hotel community in PHX.  Labor, materials, and rates are up but so is rent, demand, and the long-term inherent value relative to limited inventory and buildable land in certain areas.  If construction slows down, that will also benefit this business model by driving up rents and demand...and driving down costs.

Rodney Sums · Answer

Considering how much longer new builds are taking I'm curious to see how they'll be affected by buyers' formerly low rate locks expiring before construction is done and ready to close.

Mike Smith · Answer

@Bruce Woodruff We are already seeing a slowing of sales velocity in Boise, Idaho market.  Nationwide we are starting to see dramatic drop offs in traffic numbers.  I feel that we will plateau (no/small increases over the next few years) vs a large drop in prices.  There are still a lot of buyers in many markets and they are all legitimate buyers with real jobs, unlike the last downturn.

However, the fed has dumped about 500 billion dollars into the US economy in the last two years.  Nobody knows how high the interest rates have to go to slow down inflation.  So there is that...

Is new construction going to go in the tank?

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