A New Era for US Housing as Single-Family Home Building Skyrockets

US Builders continue to see a boom in new construction communities as the rest of the real estate market lags.

A New Era for US Housing as Single-Family Home Building Skyrockets
New construction continues to boom. 

It’s no secret that the single-family home construction sector has encountered immense challenges in the past few months. Rising mortgage rates and the high cost of construction materials have thrown the housing supply and demand totally off balance. However, based on recent housing data, the tides are slowly shifting in favor of home builders and buyers.  

The U.S. Census Bureau and the U.S. Department of Housing and Urban Development released a joint report indicating a surge in the construction of single-family homes. Here are some of the key takeaways from the report:

  • The number of single-family housing starts recorded in February 2024 was 1,129,000, an 11.6% increment from the previous month. This is the highest level it’s reached since April of 2022.
  • Building permits rose to 1,031,000, a 1% increase from January.
  • Completions of single-family homes reached 1,072,000 units, a whopping 20.2% increase in one month.

This article explores some factors influencing the upswing trend in single-family home construction.

Factors Influencing the Increase in Single-Family Home Construction

Persistent Housing Shortage

The acute shortage of affordable housing units is a key factor driving this increase.

Although the real estate market has been recovering gradually from the pandemic-driven lows, it’s still experiencing a severe shortage of at least 7.2 million units. A lack of adequate new construction means rental rates and home prices remain high, making it challenging for individuals to find affordable housing.

Therefore, it’s a no-brainer that building more homes can help solve the current housing crisis. But it’s not just any homes. Statistics show that up to 80% of Americans prefer single-family homes to apartments and condos.

Home Builders’ Incentives

The real estate market may be in a sticky situation, but home builders still need to sell properties to stay afloat. One trick that they’re using to draw buyers is to offer incentives. Research shows up to 56% of new home builders offered incentives in January. The most common incentives offered by builders of single-family housing units are:

Mortgage Rate Buydowns

Offered by sellers and home builders, this financing solution allows a buyer to pay a lump sum amount in exchange for a reduced interest rate in the first few years of the loan. The interest rate then increases gradually in the following years until it resumes the original rate.

A mortgage buydown acts as a subsidy, making it more affordable to buy a home. A recent survey by John Burns Research and Consulting revealed that 60% of home builders use rate buydowns to entice buyers. Of this proportion, 30% offer full-term 30-year buydowns.

Waiver on Closing Costs

Another tactic home builders use to encourage home buyers is offering a waiver on closing costs.

Closing costs account for 3% to 6% of the entire home price, posing a financial hurdle for buyers on a budget. Thankfully, more and more home builders are offering to cater to this expense, making single-family homes more affordable.

Free Upgrades in Single-Family Homes

Free upgrades are another incentive offered by home builders. When new single-family homes come with modern countertops and appliances, they become more attractive to buyers because they don’t have to pay extra to furnish their spaces. Although our previous research has shown buyers are unwilling to pay more for environmentally friendly upgrades, they often make enticing incentives.

Increased Optimism Among Home Builders

The uptick in single-family home construction can also be attributed to increased optimism among home builders. The National Association of Home Builders reported that their confidence rose to 51 this month, the highest since July 2023.  

The Federal Reserve stated it would reduce the federal funds rate in the latter half of 2024. Given the expectation of inflation rates moderating, builders are hopeful that mortgage rates will decrease, attracting new buyers.

Since December 2023, the mortgage rate has dropped to the 6% threshold at least five times. Although this rate remains relatively high compared to previous years, there’s hope of a downward trajectory. It’s decreased by over a percentage point from the 8.45% registered in October last year.

What Is the Effect of Increased Single Family Home Construction?

The surge in single-family home construction is pleasant news for home builders, as they’ll start reaping hefty returns on their investment. But, this uptick is particularly good for home buyers and investors.

An increased supply of these housing units will push prices down or stabilize them. This means they’ll be more affordable for interested home buyers. Secondary benefits from this surge include job creation, better facilities for the wider community, and increased economic activity.

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