New Home Construction Jumps 18 Percent Amid Low Inventory

A for sale sign is posted in front of a home in San Anselmo, Calif., on March 22, 2023. (Justin Sullivan/Getty Images)

The construction of new single-family homes increased by double digits in November as a supply shortage continued to boost homebuilder interest in housing construction.

Single-family housing starts surged 18 percent in November compared to October, according to data from the U.S. Census Bureau.

Thomas Ryan, a property economist at Capital Economics, attributed this rise to “the extreme lack of existing inventory on the market,” which “continued to support newbuild demand and construction activity in November.” Single-family housing starts jumped to its highest level in 18 months, he noted in a Dec. 19 post.

Owing to a slowdown in building permit issuance in recent months and the stabilization of new home sales, Mr. Ryan expects this gain to be “partially reversed” this month. However, “the big picture is that with mortgage rates falling and inventory tight, housing starts are likely to stay a lot stronger than they were in the second half of 2022.”

Housing supply has been low throughout this year. By the end of November, there was only 3.5 months of housing inventory available for sale at the current pace of sales, according to data from the National Association of Realtors (NAR).

This is far lower than the five to six months of inventory typically required for a balanced market. A low inventory tips the market in the favor of sellers.

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In a Dec. 19 press release from the Mortgage Bankers Association, Mike Fratantoni, the organization’s chief economist, said that while 2023 has been a slow year for purchase mortgages, lending for new construction has been a “bright spot.”

“That trend continued in November, with applications to purchase a new home up 22 percent compared to last year, while the purchase market as a whole remains about 20 percent behind last year’s pace,” he said.

Mr. Fratantoni noted that a growing share of this demand for new homes is being funded via Federal Housing Administration (FHA) loans, which are aimed at helping moderate- and low-income families achieve home ownership. FHA loans are especially popular with people who are buying homes for the first time.

The rising share of FHA loans in new construction mortgages “is a sign that first-time buyers remain a strong force in this market,” Mr. Fratantoni said. “We are forecasting that lower rates should help to keep this demand strong as we enter the spring homebuying season.”

Rising Construction, Falling Rates

Commenting on the latest housing numbers, NAR Chief Economist Lawrence Yun pointed out that “as home builders ramp up production, more supply will reach the market.” While the housing starts jumped 18 percent in November from the prior month, they were up 42 percent compared to a year ago, he stated.

“Home builders’ sales have been up this year despite high mortgage rates due to the offer of incentives on buying down interest rates and the long-held business model of offering co-op commission to buyer agents. That’s the free market way of doing business in a very competitive industry,” Mr. Yun said.

“Even more home building will be needed with the housing shortage persisting in most markets. Home price appreciation can only moderate from drastically improved supply.”

Mr. Yun thinks the housing market can “easily” absorb another 30 percent increase in home construction, “especially in light of recent weeks’ plunge in mortgage rates.”

Data from Freddie Mac show that the 30-year fixed-rate mortgage averaged 6.67 percent for the week ending Dec. 20, down by over a percentage point from its recent peak of 7.79 percent that was hit in late October.

The rate remained below 7 percent for the second week in a row, which came after 17 straight weeks of remaining above that level.

Holden Lewis, home and mortgage expert at NerdWallet, told The Epoch Times that “mortgage rates have fallen every week for two months, yet there was a decline in mortgage applications last week. Counterintuitively, that’s a sign of optimism: It means that borrowers expect rates to keep dropping.”

“They’re delaying their mortgage applications on the expectation that rates will go down even more. Home purchases usually bottom out from December through February, then pick up in March. But this two-month tumble in rates will encourage buyers, and we might see an early start to homebuying season.”

2024 Housing Market

Real estate brokerage Redfin is expecting inventories to pick up, home prices to decline, and mortgage rates to ease down in 2024, giving homebuyers a “break” from elevated housing costs.

“Prices will fall 1 percent year over year in the second and third quarters, when the home-selling season is in full swing,” said a Dec. 5 press release by the brokerage.

“Home prices will fall because supply will rise more than demand. Redfin has recently seen a double-digit annual increase in homeowners contacting Redfin for help selling their home, alongside a small drop in requests from prospective buyers.”

At present, “nearly all mortgaged homeowners” have mortgage rates below the current levels. As many of them start to accept that rates will not get back to 3 or 4 percent levels, they will look to “sell before prices fall.”

The brokerage expects mortgage rates to “remain well above pandemic-era record lows because financial markets increasingly believe the country will avoid a recession in 2024.”

Even though inflation is “largely under control,” the Federal Reserve is likely to keep interest rates at their current level at the beginning of 2024.

However, the Fed is likely to then cut rates two or three times beginning in summer, pushing down mortgage rates, Redfin stated.

The brokerage expects mortgage rates to hover around 7 percent in Q1 and then to decline throughout 2024, hitting 6.6 percent by the end of the year.