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New home construction ticked up in April, signaling a rise in demand

Justin Ho May 17, 2023

New home construction ticked up in April, signaling a rise in demand

Justin Ho May 17, 2023

The number of new home construction projects rose 2.2% in April from the month before, according to the Commerce Department. Permits for new single-family homes rose too.

Housing starts are still way down since this time last year, but the recent uptick in construction is telling us there’s a lot of demand for new homes.

Historically, around 11% of housing inventory has been new construction. But lately? “That share has increased to nearly 30% in recent months,” said Odeta Kushi, deputy chief economist at First American Financial.

A lot of current homeowners would rather hold on to their 2% or 3% mortgages than sell and buy a new house at today’s higher rates, she said.

As a result, there’s a shortage of existing homes on the market. “Builders are responding to that shortage and picking up the pace in construction,” Kushi said.

Especially in the southern part of the U.S. “If you’re talking about just sheer volume, more than half of homebuilding occurs in the South,” said Robert Dietz, chief economist at the National Association of Home Builders.

“Three of the top five single-family homebuilding markets are located in Texas,” he said. “Three of the top 10 are located in Florida.”

Construction’s also been picking up in the Mountain West — states like Utah, Nevada and Idaho, where a lot of people moved to early in the pandemic.

Population growth in those states has slowed down more recently, Dietz said. “But the expectation is we will continue to see above-trend growth rates in those mountain states because they offer more affordable pathways to homeownership.”

And compared to the West Coast and the Northeast, it’s easier to build homes in the Mountain West and the South, according to Charlie Dougherty, senior economist at Wells Fargo.

“There’s a little bit more land, it’s less expensive, building regulations are not quite as strict,” he said.

But Dougherty added that homebuilders there still face plenty of challenges: A lot of building materials, like electrical transformers, are hard to come by. Skilled labor is in short supply. Plus, land is getting more expensive.

“With those sort of constraints, it makes it all the more challenging to profitably build at lower price points,” Dougherty said.

In other words, homebuilders will have to make more expensive homes for the costs of new construction to be worth it.

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