Navigating the Housing Market Amidst Limited Options
The current real estate landscape can be particularly frustrating for those in search of a new home. In addition to the already existing housing shortage, a surge in mortgage rates, reaching 20-year highs, has made sellers hesitant to part with their homes. This predicament translates to slim pickings for potential buyers.
As existing homeowners opt to stay put, and yet aspiring buyers are eager to make a purchase, one might ponder where the additional housing supply will come from. The most apparent solution would be new construction—simply building more homes to meet the demand, right? However, this situation is more complex than it appears.
To gauge the number of new homes that will be available in the near future, we must consider housing starts, which is the count of new private residences—comprising single-family homes, condos, townhouses, and apartments—that have begun construction. The U.S. Census Bureau and the U.S. Department of Housing and Urban Development meticulously monitor these statistics on a monthly basis, offering a comprehensive new residential construction report that enumerates the monthly housing starts. This report also tracks the number of housing completions and new building permits issued for approved but not yet commenced construction.
Housing starts are a pivotal economic indicator since housing plays a significant role in the U.S. economy. As highlighted by the National Association of Home Builders’ chief economist, Robert Dietz, increasing housing production can mitigate inflation in housing costs and contribute to the Federal Reserve’s mission to maintain a 2 percent inflation rate.
It is worth noting that, similar to many other aspects of life, housing starts witnessed a sharp decline immediately after the pandemic. Overcoming subsequent challenges such as quarantine measures, supply chain disruptions, and permitting delays has made the path to recovery challenging. An increase in housing starts augurs well for buyers who have grappled with an acute shortage of existing homes for sale and for the real estate industry as a whole.
To obtain a deeper understanding, economists scrutinize the housing starts data. Mark Hamrick, Bankrate’s senior economic analyst, points out that the figures are a composite of both single-family and multifamily housing, and it’s essential to recognize the distinctions between the two. For example, recent data showed a 7.2 percent year-over-year drop in housing starts, including an 8.6 percent increase in single-family units, which was offset by a 31.5 percent decline in multifamily units of five or more. Moreover, these numbers are indicative of the national picture, while real estate is inherently localized. Starts in the Northeast witnessed a substantial 43.9 percent year-over-year drop, while the South recorded an overall 4.6 percent increase and a 16 percent surge in single-family starts. This pattern aligns with the recent influx of new residents to Sun Belt states, who are drawn to their milder climates and lower living costs.
For those deliberating between buying a home now or postponing the decision, you are not alone in your contemplation. The National Association of Realtors reports that existing-home sales dropped by over 15 percent compared to the previous year, and Redfin predicts that 2023 is poised to witness the fewest home sales since 2008.
A significant factor contributing to this market slowdown is the fact that existing homeowners enjoy mortgage rates of less than 6 percent, while new rates for a home purchase could be around 8 percent. This financial equation discourages homeowners from selling. However, prospective homebuyers need not limit their search to existing homes alone. An alternative approach is to wait for new construction projects to reach completion and purchase a newly constructed home. According to Mark Hamrick, “If you can’t find somewhere in the supply of existing housing stock, you might be wise to look at the supply that is currently being built.”
Many buyers are indeed choosing this path as existing home inventory remains scarce. Recent Census data reveals that sales of new single-family homes in September rose by almost 34 percent compared to the previous year.
Moreover, builders and developers often offer mortgage products with lower rates and other financial incentives. Mark Hamrick emphasizes, “Builders often include some assistance with financing to deal with the most severe affordability constraints seen in many decades. It doesn’t hurt to ask what promotions a builder may be inclined to offer.”
Nevertheless, it is essential to be aware that new-construction homes generally come with a higher price tag than existing ones, especially when considering customizations and upgrades. In September 2023, the median sale price for an existing home was $394,300, whereas for a newly constructed home during the same period, it stood at $418,800, according to Census data.