Builders Pivot to Take Advantage of Low Existing Home Inventory

New single-family home sales rise as the resale market lacks in supply

By Patrick Duffy

One of the most common traits you’ll likely find from this year’s list of The Production Builder 500 is their ability to pivot. Whether due to supply chain snarls that are slowly unwinding, higher mortgage rates, rising costs for land, labor and supplies or heightened demand for new homes due to low supplies of existing homes, today’s building industry executives seemingly have to be more nimble than ever before. Although some basic macroeconomic forces including low unemployment and rising wages continue to provide tailwinds for selling and renting new homes, slicing and dicing this demand curve by product type, ownership type, price point and geography based on the latest statistics have become critically important.

Fortunately, these challenges continue to be supported by record-high demand for newly built homes due to the lowest supply of existing homes since 2009. With May existing home sales down 20% year-over-year versus an equal gain for those of new homes, in many markets, would-be homebuyers simply have no other choice. Whereas the historical share of new single-family homes has typically ranged from 10% to 20%, in May they accounted for over 33%.

In turn, that additional demand has helped builders pivot from cutting prices to allocating more of their sales budgets to offering incentives, especially mortgage rate buydowns. Whereas 27% of builders responding to the National Association of Home Builders (NAHB) monthly Housing Market Index survey in May continued to report price cuts, that share fell to 22% in July. At the same time, while just over half (52%) of respondents reported offering incentives in July, that share declined from 62% last December and 56% in June.

As opposed to existing homes often in need of renovations to meet buyers’ needs, builders of new homes not only offer customized options at their design centers but can also pivot to downscaling home sizes and features in order to bring sales prices down. According to the Census Bureau’s quarterly survey of housing units started by intent and design, the median size of a single-family home started during the first quarter of 2023 was 2261 square feet, down over 3.5% from the fourth quarter of 2021. At the same time, the median size for a multifamily home in buildings of two or more units has steadily remained at just over 1,000 square feet, suggesting that more households are settling into new apartments longer than previous generations due to falling affordability for homeowners.

With May existing home sales down 20% year-over-year versus an equal gain for those of new homes, in many markets, would-be homebuyers simply have no other choice. Whereas the historical share of new single-family homes has typically ranged from 10% to 20%, in May they accounted for over 33%.”

The rebound in demand for new homes has also shown up in building permits, with those for single-family homes showing signs of improvement while multifamily permits are falling as nearly one million new apartments are under construction, which should help to tame rent growth once these units hit their respective markets. Although single-family permits for June did fall 2.7% year-over-year, they still marked the highest level over the last year. However, permits for multifamily units fell over 31% year-over-year as apartment developers contend with completions that are over 25% higher than a year ago. This could be good news for inflation readings given the importance of shelter for the Consumer Price Index (CPI), and perhaps persuade the Fed to pause or even lower interest rates sooner rather than later.

For now, builders are clearly in the driver’s seat when it comes to meeting the demand for single-family homes, which is why NAHB’s Housing Market Index measuring builder confidence rose to 56 in July – its highest level since June of 2022 and following many months well below 50, the level separating optimism from pessimism. While the index reading for the traffic of prospective buyers remains somewhat subdued at 40, it’s still the highest level in a year. Interestingly, the one covering current sales conditions rose to 62 and the level measuring sales conditions in the next six months fell to 60 due to ongoing concerns on affordability.

Still, that doesn’t mean confidence is equal among regions: The three-month moving averages of the index for the Northeast jumped five points to 52, the Midwest rose two points to 45, the South increased three points to 58 and the West also jumped by five points to 51. If these are “the dog days of summer,” the future could look even better if builders continue to successfully pivot.

Patrick Duffy is a senior contributing editor for Builder and Developer and is the founding principal of MetroIntelligence.