Inflation may be cooling down, but housing costs remain stubbornly high despite the aggressive interest rate hiking policy initiated by the Federal Reserve Bank. Home prices nationwide are still significantly higher than before the pandemic, particularly in once-affordable areas. It is especially challenging for first-time home buyers who must navigate a combination of high property prices, high interest rates, and an increasing difficulty saving up for a down payment due to the high cost of living (particularly rents) while also lacking the equity built in the sale of a previous home.
The lack of inventory, especially for entry-level homes, is nothing new. However, the issue has been exacerbated by the pandemic. While the demand has decreased as mortgage rates climbed, so has the inventory. Current property owners are understandably hesitant to sell their houses and trade off their relatively affordable mortgages with little guarantee of finding a replacement that fits their needs and budget. Therefore, inventory still isn’t catching up with demand, and home prices remain high.
One of the primary reasons behind the housing shortage long predates the pandemic: the affordable homes first-time buyers need simply have not been built. The construction industry took a major hit in the wake of the Great Recession. Since then, surviving building companies have focused on premium and custom construction to palliate the high cost of materials and labor as the industry suffers from a significant shortage of skilled workers. They must also navigate challenges regarding zoning and local opposition. However, high interest rates could encourage builders to take on projects more suitable for first-time buyers’ shallow pockets.
Improvement on the Horizon
“Buyers should expect that over the next 12 to 24 months there will be a notable increase in the number of entry-level homes available,” says Ali Wolf, chief economist of Zonda, a building consultancy. As housing affordability declines, builders have started to take on smaller, more affordable projects. The median new-home footprint declined about 3% year over year, to about 2,270 square feet in the first quarter of this year, according to the National Association of Home Builders (NAHB). The share of townhouses among newly built single-family construction also increased from 11.5% to 15% in Q4 2022.
“Whenever you see an increase in interest rates and a decline in housing affordability, the market shifts a little bit toward somewhat smaller homes,” notes NAHB Chief Economist Robert Dietz. While new construction is often associated with custom features, these new houses will probably look slightly different. “The home probably won’t feel particularly premium at a low price point right now,” says Wolf.
Builders are expected to erect just 6% more entry-level homes this year compared to last year, according to the May homebuilder survey from John Burns Research and Consulting. However, things could look up for entry-level homes in the coming years. According to the same survey, about 42% of builders plan to reduce the square footage of the homes they produce, 22% will offer smaller lots, and 20% will construct more attached homes, such as townhomes and duplexes.
We’ll keep you updated on further developments. In the meantime, if you’d like more information about buying/selling or refinancing in today’s market, give us a call or drop us an email.
