Construction of single-family homes is expected to gradually rise this year, as a growing economy, solid employment gains and rising household formation buoys builders forecasts.
This past year, the National Association of Home Builders projected 1.16 million total housing starts in 2016, which was up nearly 5% from the previous year. Now NAHB is forecasting a 10% increase in single-family production for 2017 along with a 12% rise for 2018.
Builders forecast massive development in building
Still, there’ll be pressing challenges as builders look to enhance their supplies this year.
“While positive developments on the demand side will support solid growth in the single-family housing sector in 2017, builders in many markets continue to face supply-side constraints led by the three Ls – lots, labor and lending,” says NAHB chief economist Robert Dietz. 64% of builders reported “low” or “very low” lot supplies. “The industry needs to recruit more workers and get more land in the pipeline, but it will take time.”
Builders are particularly facing challenges building $200,000-range entry-level homes. Regulatory requirements comprise nearly 25 % of the cost of a brand new home, which has made construction on lower-cost homes more challenging, Dietz says.
Nevertheless, town-home construction, which has a tendency to attract younger buyers, is definitely showing significant growth, comprising 12% of all single-family starts, Dietz notes.
“As millennial’s age, that is a big potential base to expand the home buyer market,” adds Frank Nothaft, CoreLogic’s chief economist.
While higher rates on mortgages may soften demand this year, builders remain upbeat. NAHB forecasts mortgage interest rates to average 4.5% in 2017 and then 5.3% in 2018.
“Higher mortgage rates will be offset by stronger wage gains and job growth, which suggests that housing demand will increase this year,” says David Berson, chief economist for Nationwide Mutual Insurance Co. “The question is: How much will supply go up?”
Many metro areas nationwide are seeing solid job growth, dropping mortgage delinquency rates, and strong housing price gains, Berson notes. He admits that demand has been exceeding supply and likely will continue to do so in 2017. That could put more pressure on home prices, however.
“If there aren’t enough homes on the market, that will be a problem,” Berson syas. “Price gains need to moderate. We can’t have 6, 7, or 8 percent gains. That is not sustainable.”
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