Construction remains mired well below desired levels
Amid the continuing challenges posed by high interest rates and squeezed affordability, there was a glimmer of good news for the US housing market last month with the announcement of a sharp uptick in homebuilding.
Construction of new homes across the country saw a 10.7% surge in February, government data showed, marking the largest increase since May as an annualized rate of 1.52 million starts exceeded economists’ expectations.
Single-family starts hit their highest level for two years, with multifamily home starts also up 8.3% after slumping in January.
Still, there’s plenty to do on the inventory front – particularly considering the likelihood that construction isn’t likely to catch up with the required pace for several years, according to a leading mortgage industry executive.
Eddy Perez (pictured top), founder and chief executive officer at Equity Prime Wholesale Mortgage (EPM), told Mortgage Professional America that lawmakers had a steep challenge on their hands to enact the policies required to ease the current inventory shortfall.
“We need to find ways to give incentives to builders to build. That’s the real key here – because they want to give incentives to new homebuyers,” he said. “Well, that’s great. But there’s not enough new homes, and/or they’re not affordable.
“So the question is – how do we get builders? Because right now, there’s so much regulation to get a house built that adds so many layers of expenses.”
There’s likely no immediate solution to current delays, Perez said, partly because the time period from purchase of land, to shovel in ground, to final sale, is often a lengthy one.
“So all the new permits that are getting [approved], all the new lands that are getting bought now – we’re not going to see anything until 2026-27 at this point,” he said. “So we need five, six years of that market.”
US mortgage rates last week topped 7% for the first time in a month, while home purchase applications fell by the most since mid-February.https://t.co/7XmefloLMk#businessnews #mortgageindustry #mortgagerates #homesales
— Mortgage Professional America Magazine (@MPAMagazineUS) April 12, 2024
Mortgage market realities continue to hinder prospect of new listings
Of course, another factor preventing new listings from hitting the US housing market is the reality that many Americans took advantage of slashed interest rates during the COVID-19 pandemic to lock in a mortgage at extremely low borrowing costs – meaning they have little reason to move or sell their current property and face a much higher rate with a new mortgage.
That’s not to mention home prices continuing to climb across the country. Data from Redfin released last month showed that US home price appreciation had returned to pre-COVID levels, with February seeing prices jump 6.7% compared with the same month in 2023.
Price growth is still significantly lower than at the height of the pandemic, when year-over-year appreciation topped out at 22.9% in March 2022, but up over its June 2023 low of 3.4%.
“There’s a lot of people that are, as they call it, loan-locked, where they have a very low interest rate,” Perez said. “If they sold their house, yeah – they’d make a lot of money. However, go buy another house, it would cost them more because there’s been inflation there.
“So they’d rather just stay in their house or keep their house and make it an investment property. Well, that’s not creating more supply. They’re actually eating supply up, and then they’re buying another house when they can.”
How is homebuilding expected to shape up for the rest of the year?
The National Association of Home Builders (NAHB) is taking an optimistic view of prospects for US home construction in 2024, with chief economist Robert Dietz telling Mortgage Professional America in February that this year could mark something of an “inflection point” for single-family starts.
The association expects that type of construction to jump by between 5% and 6% in 2024, bucking a trend that’s seen a slower pace over the past two years.
Still, there’s a more sobering picture for multifamily starts. Apartment construction is likely to slide by around 20% this year, according to NAHB, as tight financing conditions and oversupply in some markets weigh down on construction.
Needless to say, much will also depend on the Federal Reserve – which is expected to lower interest rates at some point this year, but to date has remained on hold as it weighs up the economic landscape.
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