With New Construction Weak, Supply Will Remain Tight
This week’s new data focused on rates—and when they will rise—and the ongoing lack of growth in single-family new construction, which means affordable options will continue to be in short supply for first-time buyers.
Ironically, fixed mortgage rates increased this week with the biggest weekly gain this year, in anticipation of the Federal Reserve being more aggressive with future rate moves.
Instead, the Fed was passive.
The Fed’s Open Market Committee, which sets monetary policy for the U.S., let policies remain unchanged, including the planned ending of quantitative easing in October.
Continued evidence of underutilization of labor and weak inflation drove the consensus view that although bond purchases will end next month, no increases are currently planned for the key Federal Funds Rate for “considerable time,” to give the economy time to pick up steam.
Most economists and analysts expect the Fed to increase the federal funds rate next summer.
The weekly mortgage application data for the week ending Sept. 12 jumped 8%, more than reversing the prior week’s decline. This indicated that the prior week was impacted more by the Labor Day-shortened week than by any sudden turn in consumer sentiment.
Speaking of reverses, August new construction data showed permits down 5.6% over July and starts down 14.4%. The month-to-month whipsaw was based on normal swings in multi-family new construction.
The single-family numbers were not statistically significant, indicating new homebuilding is moving along at roughly the same pace as we’ve seen all year.
The continuing low level of single-family new construction is a direct result of the depressed first-time and entry-level market limited by current credit qualification hurdles.
Builders have been investing in lots and product designs reflective of a more-qualified buyer—that’s why we’ve seen new home prices and new home sizes grow.
But that also means they aren’t building large volumes of affordable homes the first-time home buyer needs.
With new single-family construction remaining weak, we will continue to see limited overall supply of homes for sale, and finding affordable homes for sale will continue to be challenging.
The South region currently dominates the new home market with 55% of the single-family starts in August. The generally more-affordable South has experienced 12% year-over-year growth in single-family starts.
By: Jonathan Smoke
