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Real Estate

How homebuilders are competing in this crazy market

Builders are getting better at keeping home prices low, but their own costs are rising

New home sales in 2021 picked up right where they left off in 2020, near their highest levels in more than a decade thanks to low inventory. The state of the market means increased competition among homebuilders, who are grappling with how to keep prices affordable as their own costs rise.

Sales of new single-family houses in January were at a seasonally adjusted annual rate of 923,000 — 4.3% above December’s rate, and a whopping 19.3% higher than original estimates by the U.S. Census Bureau and the Department of Housing and Urban Development.

Regionally, new home sales declined 13.9% in the Northeast, and rose in the other three regions, up 12.6% in the Midwest, 3% in the South and 6.8% in the West.

Unsurprisingly, another month of record-low mortgage rates, limited supply of existing homes, and a wave of millennial buyers resulted in the market maintaining a blistering sales pace in the start of 2021. Supply is still tight – the Census Bureau calculated just 307,000 new homes were on the market, roughly four months worth of supply at the current sales rate.

While supply constraints have been a source of ongoing frustration for much of the industry, Zillow economist Matthew Speakman sees a positive: increased competition for homebuilders.

“In January, the share of homes sold before beginning construction was 30.8%, up notably from both December and January 2020,” Speakman said. “This is exactly the kind of tone builders wanted to set at the start of 2021, establishing a very strong early pace for new home activity to come.”

Despite challenges, including rising costs of lumber, land and labor, confidence among homebuilders remains near an all-time high, and builders are finding ways to overcome obstacles. They are waiting to begin construction on a home until a sale is secured and/or favorable supplier and contractor agreements can be worked out, Speakman said.

As for how much borrowers paid, the median sales price in January was around $346,000, while the actual sales price averaged closer to $409,000. Chuck Fowke, chairman of the National Association of Home Builders, expressed some worry over hot home prices hurting prospective buyers.

“Rising affordability issues are looming this year, particularly increasing building material costs, including lumber, which is adding $24,000 to the price of a typical newly-built home,” Fowke said. “Builders also cite rising regulatory issues as a potential concern.”

But homebuilders are getting better at offering homes at affordable prices. In January, 38% of new homes were sold for less than $300,000, compared to 35% in December, according to Holden Lewis, home and mortgage expert at NerdWallet.

Ultimately, with existing home inventory at all-time lows, the demand for new construction remains strong, noted NAHB Chief Economist Robert Dietz.

“However, rising building and development costs, combined with recent increases in mortgage interest rates, threaten to exacerbate existing affordability conditions. Builders are exercising discipline to ensure home prices do not outpace buyer budgets.”

RLCO Real Estate Advisors‘ Gregg Logan said he expects a strong 2021 overall, but is concerned about availability and affordability.

“Builders at the top-selling master planned communities are quickly running through their lot allocations, lumber prices are high, and appliances are sometimes hard to obtain quickly, and all of this is stretching out the home purchasing process,” he said. “In short, demand is strong, but will the industry be able to meet the demand?”

While construction continued to play catch up in to the new year, some economists speculate that buyers simply bought new because there were limited resale options.

“There is an insatiable demand for homes right now, and it can’t be met by resales of existing homes, so people are signing contracts for new homes,” said Lewis.

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