Yahoo Finance Homebuilders ramped up new construction as inventory woes persist
Homebuilders stepped up new construction last month amid persistent inventory shortages, but they weren't as bullish on future developments.
Housing starts for both new single- and multi-family units increased to a seasonally adjusted annual rate of 1.452 million units, according to the Census Bureau data out Wednesday. That’s 3.9% higher than June’s revised estimate rate of 1.398 million units and 5.9% higher from a year ago. That pace just exceeded the 1.450 million units economists surveyed by Bloomberg projected.
Permits to build came in at an annualized rate of 1.442 million units in July, just a 0.1% gain from the revised June rate of 1.441 million units and lower than economists' expectations of 1.463 million units. Single-family dwellings permits rose 0.6% from the month prior to 924,000 units. On the multi-family side, the pace delivered a rate of 464,000 units in July.
For much of the year, homebuilders have been optimistic as a limited supply of previously owned homes sparked more interest in new construction. But with mortgage rates now hovering near 7%, consumers are again feeling the pinch of affordability and builders have noticed. The latest builder sentiment dipped for the first time in August, after seven consecutive months of increases.
"Rising mortgage rates and high construction costs stemming from a dearth of construction workers, a lack of buildable lots and ongoing shortages of distribution transformers put a chill on builder sentiment in August," Alicia Huey, NAHB chairman and a homebuilder from Birmingham, Ala., said in a statement on Tuesday.
New construction has been a key source of housing inventory as homes on the for-sale side remain near historic lows. Many homeowners are reluctant to sell and lose their low mortgage rate for one that is twice as high.
As a result, many homebuilders have started to refocus their attention on first-time homebuyers, who are making up a larger share of their buyer pool. Builders are offering mortgage rate buy-downs to make financing more affordable, while others are shrinking the size of the homes they build.
For example, LGI Homes (LGIH) reported in its second quarter earnings ending June 30 that “the percentage of closings coming from homes smaller than 1,500 square feet went from 19% in the second quarter of last year to 27% in the quarter just completed,” per Eric Thomas Lipar, CEO.
But LGI Homes isn’t the only one employing these tools from their toolbox. Nationally, the trend is holding ground.
Data gathered from the Census Quarterly Starts and Completions by Purpose and Design and NAHB analysis shows the average square footage of a new home stood at 2,469 square feet in the first quarter of 2023. That’s a 2.2% drop from the previous six quarters when the square footage averaged 2,525 square feet.
“It’s all about solving for affordability,” Eric Finnigan, vice president, research and demographics at John Burns Research & Consulting, told Yahoo Finance. “Builders are reducing the square footage of their homes as one way to keep costs down and their homes affordable.”
While home sizes have steadily gone down, the price of one has not. There are several factors impacting this including the increased costs to build. The average price per square foot of new houses has climbed over the past decade, advancing more than 95% nationally, LendingTree reported.
“Increased raw material costs and labor scarcity issues during the pandemic made it considerably more expensive and challenging for builders to construct homes. As the cost of building rose, so did the costs passed on to homebuyers,” Jacob Channel, senior economist at LendingTree, wrote.
“It’s clear that building a home is often anything but cheap, and that finding a place to construct a large house can be challenging,” Channel added.
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Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv.
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