A Boost for Builders is On the Way
With the dog days of summer upon us and the year more than half way through, there are still a plethora of questions of where the housing market is headed. Per new data from the U.S. Department of Housing and Urban Development and the U.S. Census Bureau, new home sales dropped to the lowest level since November 2023. Sales of new homes in June fell to 617,000 seasonally adjusted annual rate, while the pace in June was down 7.4% from the year prior.
Elevated mortgage rates which hovered at an average of 7% kept prospective buyers in a holding pattern, but inflation suggests that these rates could be dropping in the months ahead.
High mortgage rates have had a negative, residual effect on builder confidence in the market for newly built single-family homes. In July, builder confidence was 42, which is a dip by one point from June, according to the NAHB/Wells Fargo Housing Market Index (HMI). This is the lowest reading since December 2023.
“While buyers appear to be waiting for lower interest rates, the six-month sales expectation for builders moved higher, indicating that builders expect mortgage rates to edge lower later this year as inflation data are showing signs of easing,” said NAHB Chairman Carl Harris.
The existing home market being pulled back is also a product of the higher mortgage rates. Along with record high prices, June marked the fourth straight month where existing home sales fell, according to data from the National Association of Realtors.
Total existing home sales, which includes single-family homes, townhomes, condos and co-ops, fell 5.4% to a seasonally adjusted annual rate of 3.89 million in June. This is the lowest level since December 2023. In comparison to June 2023, sales were 5.4% lower.
June also marked an increase in building material prices. According to the most recent producer price index (PPI) report published by the U.S. Bureau of Labor Statistics, inputs to residential construction, goods less food and energy, which represents building materials, rose 0.19%.
“Year-over-year growth has continued to climb this year, June’s increase was the highest since February 2023,” said NAHB Director for Tax and Trade Policy Analysis Jesse Wade. “Despite overall inflation declining, prices for inputs to residential construction have accelerated since the start of the year, leaving home builders to continue to deal with higher building material prices.”
As far as trends, one thing the industry is seeing is that popularity of lots for single-family detached spec homes is rising, according to NAHB’s analysis of the Census Bureau’s Survey of Construction (SOC) data.
“The U.S. median lot value for single family detached for-sale homes started in 2023 stood at $58,000, with half of the lots valued higher and half of the lots valued lower than the median,” said NAHB Assistant Vice President for Housing Policy Research Natalia Siniavskaia. “Even though lot values continued to rise, overall U.S. inflation averaged 4.1% in 2023 and outpaced lot appreciation.”
Share of smaller lots is also at a new high. Per the latest Survey of 65% of new single-family detached homes sold in 2023 were built on lots under 9,000 sq. ft. According to the latest SOC, this is the highest share that’s ever been tracked. In 1999, when the Census Bureau started tracking these figures, 46% of new for-sale single-family detached homes were occupying lots of this size.
“A shift in speculatively built (or spec) home building towards smaller lots continued despite the pandemic-triggered suburban flight and presumed shifts in preferences towards more spacious living,” said Siniavskaia. “The steadily rising share of smaller lots undoubtedly reflects unprecedented lot shortages confronted by home builders during the pandemic housing boom, as well as their attempts to make new homes more affordable.”
Brian Alvarado is the senior editor at large for Builder And Developer Magazine.