PodcastNational Housing Market Outlook

How Long Will Home Builder Euphoria Last?

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Dean Wehrli

August 11, 2023

With those low mortgage rate golden handcuffs keeping a huge chunk of the existing home market in cryogenic stasis, the new home sector has thrived. There is even a case to be made for continued good times even if resale listings begin to rise and mortgage rates remain elevated.

There are certainly hurdles ahead, but our Director of Research and Managing Principal, Rick Palacios Jr., makes the case for continued new home resilience on the latest episode of the New Home Insights podcast.

Featured guest

Rick Palacios Jr., Director of Research and Managing Principal, John Burns Research and Consulting

How low resale inventory forms the bedrock

  • Sometimes (most of the time?), the obvious answer is the right answer. That fits here—it has become a truism that limited resale supply has bolstered the new home sector, and in this case, that truism is true.

  • There are reasons beyond the obvious, though. Yes, those locked-in low mortgage rates are critical and constricting. But other factors are pushing existing home inventory down—people staying in their homes longer, an aging population with low mobility rates, structural shifts in the mortgage market, and very little distress in the housing market.

  • The thing is, when Rick analyzes historical norms over the last 40 years, he sees that the market could handle more supply. A lot more—as in roughly one million more listings to get things back in balance. Obviously, a rapid rate of increased supply could be disruptive, but there is clearly room for more.

  • How might inventory grow? With a steadily improving economy, income growth outpacing inflation, relatively stable mortgage rates, and rising home equity. Those are the good reasons. There are some less-good ones, though, like increased distress, particularly due to economic problems and consequent job losses. 

Why most folks in the new home world are still smiling

  • Sales rates at new home projects throughout much of the country have been solid since the beginning of the year. Imagine being told that would happen late in 2022 despite mortgage rates around 7%.

  • Seasonality is still a thing despite the weirdness of the last few years, but Rick argues a deep dive into sales rates and a likely increase in community count implies continued strong sales volumes at least through the rest of year.

  • Homebuilders have to be nimble, though. With costs and rates what they are affordability is still an obstacle. Homes can be smaller, then, maybe the spec level a little more focused on what buyers need most.

  • But with existing home supply being what it is, and with access to relatively inexpensive capital, the larger public builders have seen their market captures soar.

What's next?

  • There are always threats. In the near term, that might be something like a re-acceleration of inflation or an energy shock. You never know what the next black swan will be.

  • The good news is that Rick sees some calmness ahead. Stable to perhaps slightly lower mortgage rates, solid sales, and price appreciation in the lower single-digit range. Again, transport yourself to your head space in the fourth quarter of 2022—you would take this.

There are many more insights and analyses from Rick on the podcast, so check it out. Then tell us what you think. You can follow more insights from Rick on Twitter (now X?) at @RickPalaciosJr Connect with Dean on LinkedIn if you want to engage about anything housing related.

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About The Author

Dean Wehrli
Principal
Dean helps housing sector clients figure out not just what might work and what might not, but why.

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