Demand for housing remains sky high, yet homebuilders seem to be slowing down construction. Based on a National Association of Home Builders (NAHB) survey of roughly 440 builders, most seem cautiously optimistic about this year’s new build market.
Labor shortages and rising material costs continue to plague the industry from the pandemic, but the construction backlog is steady.
Despite a small drop in mortgage rates and a slight increase in new builds since January, the residential sector of the real estate market remains a top concern. One of the biggest questions for 2023 is: will the homebuilding market undergo a resurgence, or will it stand still?
What Issues Are Home Builders Facing?
Last year, builders said the cost of materials, product availability, rising inflation and cost and availability of labor contributed to the squeeze on new construction projects. In 2023, builders anticipate other issues, including high-interest rates, skittish buyers, and an overall gloomier economic picture, will become more prominent. While inflation remains a top concern, it shows signs of cooling off this year.
More than half of respondents (62%) say building material costs will remain a significant issue for builders in 2023, a notable decrease from the 96% who cited that as a top concern in 2022. The cost of building materials shot up in 2021, but growth has been slowing since.
Shipping also remains a problem. While the rest of the world has opened up post-pandemic, China has kept many protocols in place. This has locked up many supply chains and led some observers to project long-term growth in U.S. and Mexican production numbers while China's market share dwindles.
Let's dive deeper into the five top concerns home builders have expressed for 2023, including:
- Attracting buyers
- High building costs
- Land use issues
- Regional and generational inequalities
1. Financing Problems
Buyers are begging for new construction, but home buyers are worried about securing financing for their projects. Two major factors contribute to these concerns: high-interest rates and the debt-to-income ratio plaguing many prospective home buyers.
High-interest mortgage rates are distressing for both buyers and builders because builders are unwilling to commit to building homes that may not sell. In fact, 93% of builders believe high-interest rates are the biggest issue they’ll face in 2023, despite just 66% reporting it as an issue in 2022.
While mortgage rates are still low compared to the 1970s, 80s, 90s, and early 2000s, they have almost tripled since the emergence of COVID-19. Mortgage rates generally follow the U.S. 10-year Treasury Bond's yield. As inflation rises, bond yields generally follow suit. Consequently, the higher inflation goes, the sharper mortgage rates rise. We won't see mortgage relief until we see inflation reduction.
Builders' second concern relates to buyers' qualifications. Many residential construction leaders feel that buyers won't qualify for mortgages. Others worry about inaccurate appraisal values, unfavorable fees, and LTV limits. Debt-to-income ratio is the most pressing reason that hopeful buyers get denied. Unless American households can reduce debt, they are unlikely to invest in new homes.
2. Attracting Potential Buyers
Builders face several obstacles when attracting interested and qualified buyers. First, of course, are the high-interest rates.
Many potential buyers have chosen to simply wait out the purchase of a new home until rates improve in their favor, and according to the NAR report, 80% of builders believe this will remain an issue in 2023. Other would-be buyers are eager to move but cannot sell their existing homes due to mortgage rates and credit crunches. The report found just 13% of builders said buyers being unable to sell their homes was an issue faced in 2022, but more than half anticipate it being an issue this year.
Then, there's the matter of convenience. Modern Americans change jobs frequently, which makes renting a more sensible option for many families. It's easier to rent 12 homes in 30 years, for example, than it is to buy and sell 12 homes.
Finally, homeowners who bought homes during the pandemic at record low rates are wary about selling these homes for fear of trading for a much higher rate. Even those homeowners who have outgrown their purchases or need to move are stuck until market conditions become more favorable. Families are willing to endure long commutes, tight spaces, and imperfect school districts for low mortgage rates.
3. High Building Costs
Volatile material costs remain a pressing concern for builders. Even though pandemic-era supply chain shortages have eased, subsequent inflation has kept wholesale prices high. The U.S. financial policy during the shutdowns and the economic effects of the Russo-Ukrainian War have boosted cement, diesel, and asphalt prices even while the labor market flags.
New and cumbersome residential building codes and energy efficiency requirements are also troubling builders. As many federal and state-level energy and building code requirements go into effect, the overall industry will become more stringent, causing costs for labor and materials to increase. California, Vermont, Massachusetts, and Washington D.C. have all instituted major changes to residential codes this year.
The cost and availability of labor remains a concern despite the job market's overall improvement. The construction sector struggles to attract workers due to gender disparity, aging workers, low immigration numbers, and a generation that’s less interested in trades and skills work. The Associated Builders and Contractors estimate an additional 546,000 workers are needed in 2023, on top of the normal hiring pace, to meet the current demand for labor.
4. Land Use Issues
Land-use regulations can cause or eliminate housing shortages. The disputes over these regulations often pit developers against residents and regulators, leaving no real winners. Municipal governments struggle to balance affordable housing needs with zoning laws while builders cope with inadequate public infrastructure and increasing environmental regulations.
Recently, some state legislators have introduced bills meant to curb the overall housing shortage nationwide. States like Connecticut, California, Montana, and Indiana are grappling with zoning reforms that could expand access to affordable housing. Every major American city is currently experiencing a housing shortage, and municipalities are looking at what they can do about it.
The 2021 Infrastructure and Inadequate Jobs Act was passed at the federal level to improve infrastructure deficiencies. It was the single largest investment in U.S. public works in decades. However, that money will only start to flow this year and then goes just to select infrastructure projects. Only later will these federal dollars begin affecting residential construction.
5. Regional and Generational Inequalities
When work-from-home policies became standard, many Americans traded their urban lifestyles for bigger houses and the moderate pace of the American Southeast or Southwest. Families left cities like Chicago, New York, and Los Angeles for places like Nashville, Phoenix, and Raleigh. Consequently, homebuilders in these areas are often experiencing unexpectedly high demand even as the housing market softens in larger cities.
Not only do regional trends stress certain builders while leaving others with less work than projected, but generational moving trends. While millennials buy many homes, they rarely have the cash or the credit score boomers have, which tilts the market toward areas where boomers want to live.
Additionally, boomers want to purchase retirement properties, while millennials are more likely to look for homes suitable for young families. This inequality may influence builders to construct homes boomers will buy but shut out the largest generation of prospective buyers in history.
What Does the Future of Home Building Look Like?
Though home builders have expressed concerns for 2023, not all is bleak. Market experts see signs of genuine growth, and many observers say they’re especially optimistic about what 2024 will bring. Three major trends give us hope for the future of new home construction.
First, the current recession is expected to end within the next few months. With the Federal Reserve's aggressive posture toward inflation and the country's overall sound economic footing, we could see the tail end of the recession by the second half of 2023. A subsequent fall in interest rates would likely boost demand for mortgages.
Second, the housing deficit isn't going away. The declines in construction in 2022 and 2023 will instead amplify the lack of affordable homes. Meanwhile, the U.S. continues to add 20 million people to its population goals every decade. The result of a growing population and a shrinking backlog will be a boom in new housing construction.
Finally, the backlog of homes is declining. The sharp reduction in available homes has left many potential homebuyers with nowhere to go — literally — except to a residential building contractor, plans in hand.
A further drop in rates, an uptick in residential construction, and builders' capacity to catch up with the 2022 backlog of homes could see a welcome shift in the market by quarter one of 2024.