Builders Concerned About Sudden Pullback in New-Home Market

Builders say more buyers are backing out of sales contracts for new homes as traffic fizzles, causing homebuilder confidence to drop for the eighth straight month, the Commerce Department reported Tuesday. Single-family home construction last month declined 10% annually, matching the lowest level since the onset of the COVID-19 pandemic in 2020, according to the data.

There has been a dramatic pullback in homebuyer demand this year, for which builders blame rising mortgage rates and material prices. The average cost to build a new home has jumped 35.7% since January 2020—an expense that gets passed to buyers—according to the Commerce Department. Ongoing supply-chain problems also are delaying construction projects, and inflation is adding to homebuyer angst.

Jerry Konter, chairman of the National Association of Home Builders, characterizes the current market as a “housing recession.” About one in five home builders reported reducing their prices in the past month to increase sales and limit the number of buyers canceling contracts, according to NAHB data. Single-family housing starts are expected to post a decline in 2022, which would mark the first decrease since 2011, says NAHB Chief Economist Robert Dietz.

Any Hope on the Horizon?

At the same time, there are growing signs that inflation is peaking and long-term mortgage rates are stabilizing. Lawrence Yun, chief economist for the National Association of REALTORS®, says the persistent housing shortage should keep buyer demand elevated in all real estate sectors over the long haul. “Homebuilders are naturally very cautious about rising unsold inventory during the construction phase,” Yun says. “But those completed homes are finding buyers within three months, which is relatively swift for the new-home market. Improving conditions within the supply chain for the delivery of items such as lumber and appliances will lessen overall uncertainty.”

Lower mortgage rates in the near future also could help. “If mortgage rates remain near 5%—after reaching 6% in early June—there could be renewed buyer activity and additional inventory declines,” Yun says.

Meanwhile, the multifamily market, which includes apartment buildings and condos, continues to be a bright spot for housing. Though starts for multifamily construction projects dipped slightly in July, Yun brushed off the decrease as a reflection of month-to-month volatility rather than a long-term trend. Indeed, multifamily construction activity is on pace to reach its highest level in more than 30 years, says Yun. “Rapidly rising rents are economic incentives for building rental housing,” he adds.