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Builders are pulling back as the new-home market stalls, and a slowdown in construction is projected to last through 2023. In a housing market already sorely lacking inventory—which is leading to falling home sales—this isn’t good news for buyers hoping for an improvement in home affordability.
Single-family home starts dropped in September and were down 5.6% since the beginning of the year, the Commerce Department reported this week. Multifamily construction, which had been a bright spot in the new-home market, now also is slowing, dropping 13.2%.
Robert Dietz, chief economist for the National Association of Home Builders, warns that expectations for further interest rate hikes from the Federal Reserve likely will further dampen new-home production. “2023 is forecasted to see additional single-family building declines as the housing contraction continues,” he says. “While some analysts have suggested that the housing market is now more ‘balanced,’ the truth is that the homeownership rate will decline in the quarters ahead as higher interest rates and ongoing elevated construction costs continue to price out a large number of prospective buyers.”
Builders are blaming rapidly rising mortgage rates, ongoing supply chain disruptions and affordability challenges for the rapid pullback in the new-home market. “High mortgage rates approaching 7% have significantly weakened demand, particularly for first-time and first-generation prospective home buyers,” says NAHB chairman Jerry Konter. “This situation is unhealthy and unsustainable. Policymakers must address this worsening housing affordability crisis.”
Builder sentiment about selling conditions and buyer traffic has fallen to its lowest level since 2012, excluding the first two months of the pandemic in 2020, according to the NAHB/Wells Fargo Housing Market Index.
Facing an Even Worse Housing Shortage
“It is understandable for homebuilders to be cautious in light of slowing home sales and recent private sector data that indicates softening lease signings for new apartments,” says Lawrence Yun, chief economist for the National Association of REALTORS®. However, he notes, the current annualized rate of 1.44 million new units is lower than the historical average of 1.5 million. Maintaining the historical average is necessary to accommodate the rising population, Yun says.
Meanwhile, the rental vacancy rate of 5.6% nationwide is at a 30-year low, and the homeowner vacancy rate of 0.8% is at a 40-year low. New listings are slowing nationwide at a time when many homeowners are reluctant to sell and give up the 3% mortgage rates they secured in the last few years. “When mortgage rates retreat after inflation is tamed in the coming years, we could again encounter an acute housing shortage,” Yun says.