Home Construction Reaches One Year High But Sales Are At Their Highest Level in a Decade

There has been much debate about the nationwide housing shortage, but home construction firms are doing their best to rectify the situation. Their hard work has resulted in a much-needed boost for potential homebuyers. New home construction is at its highest level in a year according to the Commerce Department. Construction of new properties rose by 13.7 percent in October with a significant increase in apartments and single-family homes.

However, rather than being a predictable trend, October’s statistics were at odds with data from 2017 as a whole. So far, housing starts have increased by just 2.4 percent; primarily due to a reduction in the number of apartments being developed. It is single-family homes that are driving the market at present but in October, the number of multi-family properties built increased by over 37 percent.

Is This a Sign of the Future?

At present, we must be cautiously optimistic lest the recent construction boom prove to be nothing more than an anomaly. The most important thing to note is that the mini-boom was confined to the South, Northeast and Midwest regions. That construction rose in the South is no surprise as the region looks to rebound after the damage caused by Hurricanes Harvey and Irma.

Nonetheless, the chief economist at MUFG in New York, Chris Rupkey, is encouraged by the latest developments in the new home construction industry. The nation’s economy has been recovering in key areas including retail and manufacturing, but the housing market was apparently holding everything back. According to Rupkey, housing construction was the “missing link” that signaled increased confidence in the economy. Now that the market is finally catching up, better economic times might be just around the corner.

Before the October boost, the housing construction market had endured three consecutive months of decline. Earlier in the year, issues such as expensive lumber and shortages of land hurt the homebuilding industry. Add in the fact that investment in homebuilding had contracted for successive quarters, and it is a surprise that we are having such a positive period. The question is: Can the homebuilding market continue to rebound? It needs to because of the rise in new home purchases which reached its highest level in a decade.

Robust Demand Means Supply is Still Tight

While the homebuilding market has picked up in specific regions, the demand for property has risen across the nation. According to the Commerce Department, sales of new homes rose by 6.2 percent in October. The result is a seasonally adjusted rate of 685,000 units; the highest amount since October 2007. On a year-on-year basis, sales skyrocketed 18.7 percent.

According to some economists, the milder weather was a significant contributory factor. The Northeast saw the biggest sales increase of over 30 percent while sales in the South only increased by 1.3 percent, yet the new number still represents a 10-year high. Mark Vitner of Wells Fargo Securities in North Carolina, said that sales in the Northeast and Midwest depend on mild weather.

Of the new homes sold in October, almost 70 percent are either under construction or haven’t started. If the rate of new home sales continues in this vein, it will take just under five months to clear the supply of properties on the market. Economists suggest that six months is a healthy balance between supply and demand.

Luxury Boost

Although the market desperately needs affordable properties, it is the high-end market that has seen the greatest sales boost. While the average price of a newly built home in the United States rose to $400,000 in October 2017, seven percent of home sales were comprised of properties that cost $750,000+. In contrast, only three percent of home sales consisted of properties above that price in October 2016.

There was even a slight increase in existing home sales which rose by two percent in October. It was a significantly larger rise than the 0.2 percent predicted by experts when they spoke to the Wall Street Journal. It should be noted that the latest figures still represent a year-on-year decline as supply shortages hit hard in certain areas. The median price of existing homes sold in October was $247,000, an increase of 5.5 percent on the October 2016 figure.

Final Thoughts

There is no question that the housing shortage is not something we can solve overnight. The problem has been allowed to spiral out of control as construction companies are hit with increasing costs. New homebuilders such as LGI Homes, Taylor Morrison, and Shea Homes are doing their best to alleviate the shortage. The latest figures are encouraging, and we hope it is a sign of things to come. After all, homeownership is a big part of the American Dream, and everyone deserves the chance to own an affordable home.