The nation might be in the clutches of a dire housing shortage, but builders won’t be putting up enough new homes this year to make much of a dent.
Housing starts, which is when construction has begun but not yet completed, are expected to fall to about 744,000 single-family homes in 2023 as builders continue to pull back, according to the National Association of Home Builders forecast. That’s down about 12% from last year.
However, NAHB expects new construction will rebound in the second half of the year, giving a boost to the overall economy.
“Typically, single-family construction tends to recover before the economy rebounds,” says NAHB Chief Economist Robert Dietz. “By the time we get to the second part of the year, we should see brighter economic conditions.”
There is currently a deficit of about 1.5 million homes in relation to the number that is considered necessary across the U.S. Builders would need to put up about 1.1 million homes this year to chip away at that housing shortage, which is at least partly responsible for soaring prices.
But builders are facing their own challenges. Demand for new homes has faltered as buyers are struggling to afford these residences with higher mortgage interest rates. New homes are typically more expensive than older ones. When mortgage rates and prices fall, many buyers are expected to jump back into the market.
“The fundamental challenge to the housing remains a lack of homes for sale,” says Dietz. “So when affordability improves, that will create demand for new homebuilding.”
After a banner year of more apartment and condo buildings going up, multifamily construction is expected to fall by about 28% this year. But the pullback might not be as severe as it seems. There are roughly 940,000 apartments still under construction, the most since 1973.
Home prices, mortgage rates could go down
In a boon to priced-out homebuyers, home prices could drop by as much as 15% from the peak to the trough, according to NAHB. Higher mortgage rates have taken a sledgehammer to the market as buyers cannot afford the inflated monthly mortgage payments brought on by the rates. So price growth has begun to slow and prices have even begun to dip in some markets.
Economists say this won’t be anything like the housing crash in the mid-2000s. Back then, there were more homes than buyers for them. This time the opposite is true. And home prices rose roughly 40% during the COVID-19 pandemic.
The increases over the Past year have meant the average American household can afford only about 42% of the homes on the market, the lowest percentage since the Great Recession.
But if mortgage interest rates decrease, that could give the housing market a much-needed boost as homebuyers’ monthly payments would be a bit less. Dietz anticipates rates will decline this year and next.
“Affordability will gradually improve due to a combination of falling home prices and some falling of mortgage interest rates,” says Dietz. “Buyers should be looking at a window of opportunity later in 2023, especially priced-out first-time buyers.”
Builders are facing many challenges of their own
Even if buyers are clamoring for new homes they can once again afford, builders likely won’t be able to fill the housing gap.
The scarcity and high prices of land, materials, and workers have driven the cost up in recent years.
Prices for materials spiked during the pandemic, the industry needs 740,000 new construction workers a year to keep up with demand and retirements, and it has become harder for many builders to secure financing to put up new projects, says Dietz.
This is “limiting the amount of construction that can take place,” he says.
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