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New construction sales are booming in 2023

New construction sales are booming in 2023
by Brad Cartier, posted in Newsletter

On Friday, Federal Reserve Chair Powell warned in comments in Jackson Hole, Wyoming, that the central banks were “prepared to raise rates further,” according to CNN. That said, the stock market rallied due to Powell’s more dovish comments on disinflation and the reality that interest rates likely won’t go much higher than they currently are.

Nicole Rosenthal of The Real Deal notes that homebuilder stocks sank on the news, however, due to increased exposure to higher rates. Rosenthal highlights a few quotes from Powell specific to the housing market:

“The slowing growth in rents for new leases over roughly the past year can be thought of as ‘in the pipeline’ and will affect measured housing services inflation over the coming year.”

“Going forward, if market rent growth settles near pre-pandemic levels, housing services inflation should decline toward its pre-pandemic level as well.”

Christopher Rugaber of AP News reports on the Jackson Hole speech, noting that the ongoing economic growth and low unemployment have meant Powell and central bankers won’t take future rate hikes off the table to reach the 2% inflation target. 

“In his speech, Powell did not mention the possibility that the Fed will eventually cut interest rates. Earlier this year, many on Wall Street had expected rate cuts by early next year. Now, most traders envision no interest rate cuts before mid-2024 at the earliest.”

Following the speech, the US treasury 5-year yield (2.26%) hit the highest level since 2008 as investors moved out of bonds, according to Michael Mackenzie and Ye Xie of Bloomberg. Traders predict a pause in September, with another rate hike in November. 

Flávia Furlan Nunes of Housing Wire comments on the story, highlighting that Powell acknowledges the oversized impact of the housing sector on keeping inflation elevated.

“In addition, after decelerating sharply over the past 18 months, the housing sector is showing signs of picking back up. Additional evidence of persistently above-trend growth could put further progress on inflation at risk and could warrant further tightening of monetary policy.”

Rent update

Shelter plays a core part in the inflation picture, accounting for 90% of the latest 3.2% increase in the CPI Index. New reports show rent continues to moderate, a welcome sign for the central bank and those most sensitive to future hikes. CoreLogic released its June single-family rent report, showing that rent has slowed in the month, coming in at 3.3% year-over-year, the slowest growth rate since Fall 2020. Further, month-over-month rent growth is at 1.1%, almost identical to the pre-pandemic average of 1%.

Rent growth slowing

Source: CoreLogic (August 2023) also released its monthly rent report, showing a similar deceleration. Here are a few of the highlights:

  • June 2023 marks the second year-over-year rent decline in a row for 0-2 bedroom properties (-1.0% Y/Y) observed since trend data began in 2020. 
  • Median asking rent in the 50 largest metros increased to $1,745, up by $7 from last month and down $31 from its July 2022 peak. 
  • Rent for one-bedrooms saw its first year-over-year decline in our data history, while smaller units saw rents increase. 

Rents decelerating

Source: (August 2023)

Barbara Ballinger of Globe Street comments on the topic using data, highlighting that the average national apartment rent decreased by 0.7% in July. This is the first month-over-month decline seen since the onset of the pandemic. Ballinger highlights that the deceleration trend is stronger in urban areas rather than suburban.

“Rent growth is 25% in the suburbs and 18% in cities, both down but only a small decline. In many markets, this gap is widening.  More important perhaps is that an affordability windfall is not coming to those living in the suburbs since the decline is less and slower.”

New home sales

Hannah Jones of reports on new home sales, which are outpacing resale home sales due to existing homeowners not selling due to increased rates. This lack of inventory on the resale side has pushed would-be homebuyers to the new construction market. New home sales rose 4.4% in July and was up 31.5% year-over-year “as buyers pivoted towards new construction amid low existing inventory.”

New home sales increase

Source: (August 2023)

According to Fannie Mae:

“Housing continued to be a tale of two markets in July. Existing sales remained near their lowest annual rate since 2009, while new home sales are hovering near the 2019 high of the pre pandemic business cycle. We expect that new home sales will continue to outperform relative to existing sales as existing homeowners remain “locked in” to their low mortgage rates and thus more hesitant to move.”

Indeed, Dana Anderson of Redfin reports on new construction inventory, highlighting that it now makes up a third (31.4%) of all homes on the market in the U.S. This is the highest share of new homes on the market seen in Redfin’s history. The data shows that new homes are most common in El Paso, TX, Omaha, NE, and Raleigh, NC, and least common in California and Hawaii. 

New construction record highs

Source: Redfin (August 2023)

“With inventory at a record low, many buyers are turning to new construction. But because overall demand is still relatively low, with high rates continuing to sideline many would-be homebuyers, some builders are lowering prices and offering perks to offload excess inventory. For many homebuyers, new construction is a welcome option in today’s market–especially in the southern part of the country, where new homes tend to be more prevalent.”

Logan Mohtashami of Housing Wire comments on this trend, highlighting the difference between the resale and new home markets: “Builders sell their homes as a commodity, unlike existing homeowners. Because of that, builders now have excess profit margins to use post-COVID-19, and they use it to make deals to move homes. Not all the homes being sold have price cuts or rate buy-downs. However, when the builders need to move product, they will not hesitate to make these deals happen, whereas an existing homeowner might not.”

Finally, Jeff Tucker of Zillow offers some comments on this trend, noting that builders have weathered the interest rates storm by building smaller homes and offering incentives like interest rate buydowns. Builders know budgets are stretched thin, so they can pivot to help move inventory.

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