BUILDERS’ SHIFT TO MORE HOME CONSTRUCTION...

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BUILDERS’ SHIFT TO MORE HOME CONSTRUCTION MIGHT TAKE 1-2 YEARS
Source: Wall St. Journal

Potential home buyers faced with a market that is low on inventory are likely wondering when the construction industry will fully shift to constructing a greater volume of homes. Home starts remain below their average, and many experts predict that it could be at least a year before volume picks up for more affordable homes.

Making sense of the story

• Builders are starting homes at a rate of about 60 to 65 percent of the industry’s annual average of 1 million. The shift to building a greater volume of homes at lower prices is critical to U.S. home construction getting back to its annual average rate of construction starts since 2000.

• Builders have focused mostly on building expensive homes to pad profit margins by selling fewer, more expensive homes. This has created an additional deterrent for many first-time and entry-level buyers, who are already facing tough mortgage qualification standards.

• Housing economists and builders say the shift to production volume over price will take time, with a timeframe of roughly one to two years. There are still concerns about demand from first-time buyers and their ability to finance a mortgage.

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• Builders are also facing constraints on the supply side due to a shortage of labor and lots.

• Also, many homes that builders are starting are on land that builders paid top-of-the-market prices for in recent years, meaning those builders have little latitude to lower prices.

• For the first five months of this year, builders started 396,000 dwelling units, not adjusted for seasonality. That’s up 6.6 percent from the same period last year. While home starts have exceeded last year’s tally, the growth has slowed considerably.

• Notably, there are signs lately that the market is in the very early stages of making a turn back toward its lower end. Some regional builders that cater to entry-level buyers are reporting surging sales.