Share of new construction homes hits a record high in Q3
Buyers and sellers of existing homes are sitting on the sidelines while builders try to unload their inventory of newly completed homes.
Key points:
- New homes that were started as the pandemic was easing are now hitting the market, according to a Redfin report.
- Existing homeowners are reluctant to put their homes on the market and give up their low interest rates, shifting the proportion of new construction homes for sale.
- The market share of newly built homes is expected to remain elevated, which may prompt additional concessions from builders.
With existing homeowners reluctant to trade in their low-interest mortgage rates and put their homes up for sale, newly built homes are taking up more market share.
A new report from Redfin estimates that 29% of U.S. single-family homes for sale in the third quarter were new construction — the highest share of any third quarter since the company began collecting the data. That is up from 25% in the third quarter of 2021 and 18% in the third quarter of 2020.
According to the report, newly built homes have grown as a portion of the overall housing supply since 2011, soon after the financial crisis. In 2011, the newly built home market share was just a little over 5%.
Lots of new homes, not enough buyers
Building really took off in the first two years of the pandemic as builders tried to keep pace with the surge in relocation buyers. Once migration slowed, builders found themselves with a glut of homes. While single-family housing permits and starts have been on a steady decline since early 2022, the number of completed homes rose in September, as construction was likely initiated before the downturn.
"Homebuilders started scores of projects during the pandemic moving frenzy and are now stuck with a bunch of new houses that are hard to sell because mortgage rates have risen to 7%," said Faith Floyd, a Redfin real estate agent in Houston.
That glut of homes has prompted builders to cut prices and make concessions. National Association of Home Builders (NAHB) Chief Economist Robert Dietz noted that "more than half of the builders in our [September builder confidence] survey reported using incentives to bolster sales, including mortgage rate buydowns, free amenities and price reductions."
Newly constructed homes may continue to take up an elevated market share for the coming months because of the unusual dynamics in place, said Danushka Nanayakkara-Skillington, assistant vice president of forecasting and analysis at NAHB.
While new construction is expected to slow as inventory builds, existing homeowners could remain on the sidelines, she said. As the market improves, construction could quickly pick up again because there is pent up demand for homes from potential buyers who are currently renting.
For 2023, however, builders will ease up on construction, according to Redfin Deputy Chief Economist Taylor Marr.
"Homebuilders will take on fewer new projects next year as they focus on getting their existing projects sold," Marr said. "Builders will also shift more toward multifamily units, for which there is still relatively high demand because rents remain high."
Nanayakkara-Skillington agreed, saying the multifamily market remains a stable one for builders as people are renting for longer. She expects that will lead to a decline in the homeownership rate, which was 66% in the third quarter of 2022, down from a recent high of nearly 68% in mid-2020 according to census data.
New home market share higher in pandemic boomtowns
Popular pandemic destinations tend to have a higher proportion of newly built homes for sale, according to the Redfin report. Those areas are seeing more significant slowdowns following a rapid rise in new construction.
El Paso, Texas, topped the list of cities with the highest share of new construction homes: Nearly half of the homes for sale in El Paso (49.8%) are newly built. Eleven of the top 20 metros analyzed are in Texas and Florida, with Oklahoma City (43%), Omaha (40%), Raleigh (39%) and Houston (37.1%) rounding out the top five.