BAM Key Details:
- A new report from Zillow highlights the challenges buyers face in today’s market, including higher costs and the severe shortage of affordable housing.
- A related report shows how builders are adapting to those challenges by increasing production of homes with more stories and less square footage. They’re also starting more new construction projects off-site.
After avoiding a home price crash, the housing market is stabilizing. But buyers today still face a gauntlet of challenges, starting with the fact that affordable housing is still very much in short supply.
The decline in housing supply—especially for those at lower price points—has outmatched the pullback in buyer demand, creating sustained upward pressure on home values.
A new Zillow report outlines the challenges and highlights what builders are doing to meet them.
With more multifamily housing coming available in Q3 and Q4, renters may find more financial incentive to keep renting and save for a down payment, especially if new rental communities in their area sweeten the pot and make it easier to save.
The housing market is stabilizing after the turbulence of the pandemic, but the effects will be with us for a long time. Price appreciation is back to normal after a short reset, but that means buyers still face serious cost challenges and competition, especially for the most affordable houses and in less expensive markets.
Meanwhile, builders are taking stock of the situation and looking for ways to increase the production of homes more people can afford.
Homeowners locked into lower rates have little incentive to sell, which has led to record-low levels for new listings, along with an increased share of home sales for new construction.
It helps that builders often provide better buyer incentives than sellers. Those savings make it a bit easier for buyers to stomach the prospect of paying roughly twice the monthly mortgage payment compared to before the pandemic, thanks to rising home values and mortgage rates that have more than doubled since early 2022. With 20% down, the typical home buyer in 2019 was looking at a monthly payment of $875; today, that payment is a little over $1,800.
With home price growth stabilizing, cost pressures and limited options have taken their toll on sales. Zillow forecasts a total of 4.2 million existing home sales for 2023—the lowest since 2010.
Builders are leaning into it
Builders are taking note of the challenges in today’s market and are changing tactics to meet rising costs and provide more options for motivated buyers.
High interest rates impact builders as well as buyers, and, because of this, developers are stepping up production of attached single-family home options like condos and townhomes, which are more economical than detached single-family homes.
Add in the financial incentives offered by builders—including mortgage rate buydowns—and sales of new builds have increased 24% year over year.
Also, with the just-announced partnership between Zillow and Redfin, builders and buyers can find each other more easily on both platforms: builder community pages are now accessible to Redfin.com users, and buyers on both platforms can learn about new builds not yet on the market, along with the amenities for each new development.
Developers across the U.S. are aware of the difficulties surrounding the construction of affordable housing, and what they can do is increase production of more economical options.
In 2022, construction of detached single family homes dropped by 12% while building starts for attached homes went up by 2.9%.
Single-family construction: pre-pandemic to the present
Backing up a bit, single-family home construction surged during the pandemic as builders aimed to close the housing gap. Buyer demand was high, and home prices were climbing.
But as the Fed started raising rates in 2022 to fight inflation, the cost of financing went up, and buyer demand started to cool. The pace of construction also slowed, but the types of homes being built also changed
According to Survey of Construction 2022 microdata, builders started focusing their resources on smaller, attached homes with fewer bedrooms and more stories.
Single-family housing starts in 2022 surpassed 2019’s by 14.3%. And while detached homes made up the large majority of those starts (on average, above 85%), the growth in housing was more concentrated in attached homes.
The year 2022 brought more than 37% more attached single-family housing starts compared to 2019. Detached single-family housing starts, by comparison, increased by 11%.
The increase in single-family housing starts was also more concentrated among smaller units with fewer bedrooms. In fact, homes with fewer than three bedrooms saw a 9.5% increase from 2021 to 2022, while housing starts with three bedrooms or more dropped by 13.1%.
Make it smaller—but taller
If there’s one thing IKEA has taught us is to make better use of our vertical space. And new home construction is exploring that potential by pivoting toward homes with a smaller footprint.
Homes that reach for the sky rather than sprawl are more practical when land is limited. You can fit more of them in the same amount of space, boosting inventory at a time when buyers are hungry for options.
Single-family homes more than two stories tall saw a 4.9% increase in building starts in 2022, while single-family housing starts with two stories or fewer dropped by 10.8%.
The size of these taller homes is also shrinking relative to lot size. From 2018 to 2021, square footage of new single-family homes increased relative to the size of their lots.
But as housing costs climbed and buyer demand wavered, the median single-family home shrank by 100 square feet (-4.3%), while the median lot size remained much the same, driving down the ratio for the two measures.
So, as housing affordability has worsened for many potential first-time buyers, this shift among builders makes sense. Instead of continuing to build homes guaranteed to cost well over the median (thus reducing the pool of buyers for those properties), developers are prioritizing types of housing that are more likely to sell at prices that offset the cost of building them.
Save money on building, and you can pass that savings on to your buyers. And with the shortage of affordable homes, builders can be confident that they’re not building for a shrinking customer base.
So, aside from height and square footage, what types of homes are best suited to this shift in new construction?
Off-site housing starts are on the rise
Last year (2022) brought a 23.9% increase in the number of single-family housing starts initiated off-site, compared to the year before. Compare that to the 11.2% drop in housing starts for traditional on-site single-family homes.
Compared to 2019, off-site starts of single-family construction projects grew 18.8% in 2022. During that period, on-site starts grew by 14.0%. The increase in the former is likely due to rising costs and supply chain issues.
Starting home construction off-site is generally better suited to modular homes, which tend to be more uniform in appearance. Projects of this type tend to prioritize consistency over customizability, making them more efficient to build.
Modular homes may not appeal to buyers who want their homes to be more unique, but these homes are generally less expensive to build than site-built homes, enabling builders to charge less for the finished product.
That said, there are still some obstacles to increasing the supply of affordable housing.
Zoning restrictions and regulatory fees
Builders in many U.S. markets still have to contend with zoning restrictions that limit construction in certain areas to detached single-family homes—as well as those that limit the number of housing units that can be built in a specific zone.
Regulatory fees are also an issue. When builders have to pay an exorbitant fee just to start a construction project, they then have to pass that on to the consumer by increasing the price of the finished home—driving up the cost of homeownership and keeping it out of reach for many.
It’s not enough to make renting more budget-friendly for more Americans. A government that prioritizes the financial well-being of its citizens should be doing what it can to make homeownership more accessible.
They can do this by reducing the amount builders have to pay to start new construction projects, incentivizing the construction of more affordable housing, and changing zoning laws to allow for greater density—especially in areas where housing demand far exceeds supply.
Fortunately, support for these changes is growing among homeowners and renters alike.
Something for everyone
Granted, not everyone wants a smaller but taller home, attached or otherwise. But for them, we have a bit of hopeful news, too.
A recent Zillow survey shows nearly a quarter (23%) of mortgage holders are considering selling their homes within three years. That’s not exactly imminent, we know, but that figure is a significant increase from 15% a year ago.
Takeaways for real estate agents
Whatever housing preferences your buyer clients share with you, most (if not all) first-time home buyers are willing to be flexible with the details to get into their first home and start building wealth.
So, while new listings are still at historically low levels, smaller and attached but more affordable newly constructed homes could at least get these buyers a foot in the door.
While you’re helping these clients find homes that tick all the non-negotiable boxes, make sure they know what they can reasonably expect when it comes to home price appreciation for homes like the ones described above, especially those that are—
- Modular, and
Buyers will likely express concern that these homes won’t grow in value the way a detached single-family home would—especially one with extra rooms and a big backyard—since demand for attached homes tends not to be as high. So, get the data they need, based on how long they plan to live there, and help them see the best path forward.