The Rise of New Construction: Addressing Affordability and the Future of Home Inventory. As the housing market grapples with surging prices and climbing interest rates, new construction is becoming a hot topic in the conversation around affordability. According to research from Zillow®, there is currently a staggering shortage of 4.3 million homes in the U.S. to keep up with the demand from new households. Homebuilders have been working tirelessly to address this issue, resulting in a record-breaking number of homes under construction. However, compared to last year, builders are struggling to keep up, mainly due to the skyrocketing costs of materials, labor, and mortgages, which have deterred potential buyers. Despite these challenges, new construction remains crucial in meeting the overwhelming demand for housing. Many builders are even offering incentives such as price lock agreements and attractive upgrade offers, making newly built homes more financially feasible in some cases compared to existing homes on the market.
It is becoming increasingly evident that building more homes is the only sustainable solution to improve affordability and provide greater access to homeownership. By increasing the housing supply, the competition for each home decreases, alleviating pressure on prices. Whether you are actively searching for a new construction home or simply interested in the real estate market, here are three key factors to keep in mind regarding new builds:
Existing home inventory likely reached its peak for this year: The scarcity of homes on the market is widely known among homebuyers. Many homeowners are holding onto their properties, partly because they want to retain the low interest rates they secured when they initially financed their homes. An enlightening survey conducted by Zillow revealed that a staggering 80% of homeowners with mortgages are currently paying interest rates below 5%. Senior Vice President of Parker Rose Custom Homes, Bill Burdett, explains that this “rate lock-in” effect has essentially frozen the existing-home sales market. While the pool of for-sale homes has slightly expanded, by just 0.2%, from August to September, this small increase is expected to be the peak for the year. Homebuyers searching for fresh options may have to wait until the spring and summer months, when sellers typically list their homes. Thankfully, new construction offers an alternative solution.
Builder incentives can help reduce monthly mortgage costs: With a lack of existing homes for sale, builders have significantly ramped up production. According to U.S. Census data, the sales of new homes began rebounding in early 2023, with builders completing new homes at an astounding annualized rate of 1.4 million. Additionally, they started construction on another 1.28 million homes and obtained building permits for 1.54 million more (annualized). Alongside the steady increase in new homes, builders have introduced various incentives to make home buying and ownership more affordable. These incentives include creative lender financing, builder warranties, special offers on upgrades and finishes, as well as price lock agreements. Admittedly, higher interest rates have made it more challenging for builders to lower rates enough to accommodate more potential buyers. However, industry experts predict that mortgage rates will either stabilize or decrease in the long run. Therefore, builders are investing and preparing for the moment when rates start to fall, ushering in a wave of interested buyers as 2024 approaches.
The surge in new construction plays a crucial role in addressing the affordability crisis and meeting the ever-growing housing demand. By understanding the impact of new builds on the real estate market, potential homebuyers can make more informed decisions. While the number of existing homes for sale may have peaked for this year, new construction offers an exciting alternative for those seeking their dream home. With builder incentives and the prospect of falling mortgage rates in the near future, now is the perfect time to explore the possibilities that new construction homes have to offer.
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