New Construction Homes Shine Amidst Low Resale Inventory In High-Interest Rate Market

A significant outcome of the pandemic era has been the Federal Reserve's interest rate hikes and the subsequent scarcity of resale housing inventory.  Most homeowners who purchased before 2022 secured a 30-year mortgage at 3-4% rates, back when homes were much more affordable than they are today. As a result, it doesn't make financial sense for them to put their homes up for sale and look for new ones. This situation has drastically reduced the supply of resale homes to just over 1 million. To put it in perspective, in 2018-2019, the last time the Fed raised interest rates before the pandemic, and before this, the resale supply ranged from 1.5-1.9 million. This tight supply, lasting anywhere from 1-3 months in most markets, is a driving force behind builders' ability to stimulate demand for new homes.

Why You Should Consider Buying a New Construction

The US housing market is getting better in 2023, and here's why builders have the upper hand:

Low Supply: There aren't many existing or new homes available. Most people aren't selling because of locked-in low-interest rates and unaffordable homes, except if they move to cheaper areas.

Limited New Home Production: Builders can only make around 85,000 new homes per month, and it's been like this for three years. Supply chain issues are mostly fixed, but labor problems remain.

Home Builders Help Buyers: Builders offer discounts on interest rates, making homes more affordable. Private builders can't do this, and existing home sellers can only cut prices if their homes don't sell.

Strong Finances: Public builders have solid finances and can build spec homes in bulk, while private builders rely on variable bank loans.

Price Flexibility: Builders can adjust prices in many ways, like incentives or upgrades, while existing home sellers can't.

Product Adjustments: Builders can create more affordable homes by changing designs or locations. Existing homeowners can't do this.

Land Control: Home builders have lots of land for the future, using options to secure it without high costs.

According to Alex Barron, housing research center, these factors have helped public builders grow and take up a more significant market share, from 5% in 1990 to 45% today. This trend will likely continue, even if the market isn't growing much.

What Experts Are Saying Regarding New Construction Homes?

According to Logan Mohtashami, Lead Analyst at HousingWire:

“The builders have to work off the backlog of homes, but instead of 3%-4% mortgage rates, they’re dealing with 7% plus mortgage rates, which means they have to provide many incentives to make sure those homes sell.”

Ksenia Potapov, Economist at First American, puts it this way:

“A one percentage-point decline in mortgage rates has the same impact on affordability as an 11 percent decline in house prices.”

As Mark Fleming, Chief Economist at First American, shares, that’s good news for buyers:

“While existing-home inventory remains limited, the silver lining for home buyers is that new-home inventory is on the rise, and a new home at the right price is a pretty good substitute.”

The Symbiotic Relationship Between Home Buyers and Builders

Purchasing a new construction home in 2023 could be a strategic and financially sound decision. It offers a unique chance to secure a home in a low inventory market and allows you to tailor your living space to your preferences. Furthermore, builders are capitalizing on their advantageous positions, frequently extending buydown points that can reduce interest rates to as low as 4.9% in some instances. Thanks to their acquisition of properties and lands at lower prices a few years ago. This results in a profit margin for builders while simultaneously providing substantial savings for homebuyers, creating a mutually beneficial scenario for both parties.

Conclusion

Investing in new construction homes brings a wealth of advantages; everything is brand new. Homeowners can enjoy significant long-term cost savings with no worries about roof repairs, plumbing overhauls, or electrical updates. Beyond immediate benefits, new construction homes are designed with energy efficiency in mind, boasting the latest technologies that lead to lower bills and fewer repair needs. These homes also adhere to strict building codes, ensuring higher-quality construction and fewer defects. Many new homes include warranties to protect from unexpected expenses.
Additionally, they often feature low-maintenance materials, reducing the need for future repairs or replacements. The icing on the cake is the customization option, allowing homeowners to tailor their living space to their preferences, minimizing the need for costly renovations. In essence, investing in new construction satisfies current housing needs and positions homeowners to benefit from long-term growth potential and the prospect of a hassle-free, modern living experience.

If you're in the market for a new construction home in sought-after areas like Santa Monica, West Los Angeles, Westwood, Beverly Hills, Bel Air, Brentwood, Pacific Palisades, Malibu, or anywhere in Los Angeles, finding the right property and negotiations involves navigating a complex process. Having an experienced agent by your side is essential to guide you through the intricacies. I'm here to help you and offer you a complimentary consultation. Let's make your new construction home dreams a reality. We also have access to off-market builder sites, which means we can provide insights into homes currently under construction. With our guidance, you're in excellent hands throughout your home-buying journey. Contact us today!