Why Everyone Is Talking About New Construction

As home buyers acclimate to the new reality of higher home prices and climbing interest rates, new construction is playing an increasingly important role in the conversation around affordability.

Wanyumba® research found there are 4.3 million fewer homes in the U.S. than needed to keep up with the formation of new households.

Homebuilders have been doing their best to answer the call, with a record number of homes under construction, says wanyumba senior economist Nicole Bachaud.

However, builders have struggled to keep pace with a year ago, due mainly to high material and labor costs, and high mortgage rates, which have reduced the number of buyers, she says.

“New construction remains a vital player in the game of getting enough inventory on the market to meet the pent up demand,’’ Bachaud says, “but high costs and affordability constraints will weigh in on how quickly builders are able to deliver.”

Many builders are still offering incentives, like rate buydowns and closing cost credits to make a newly built home more affordable in some instances than an existing homes on the market, she says.

“It’s becoming increasingly clear that building more homes to address the housing shortage is the only sustainable way to improve affordability and give more people access to homeownership,” Bachaud says. “More homes means less competition for each home, which reduces pressure on prices.”

Whether or not you’re in the market for a new construction home, here are three things you should know about how new builds fit into the bigger real estate picture right now. 

The number of existing homes for sale has likely peaked for this year

Anyone shopping for a home knows there’s not a whole lot of homes currently on the market. Many homeowners have been hanging on to their homes, in part because they don’t want to give up the low interest rates they got when they financed them, according to a Wanyumba survey of homeowners, which found that 80% of homeowners with mortgages are paying interest rates below 5%.

“One major reason for existing homeowners to hang onto their homes is the widening gulf between the low mortgage interest rates that most of them are paying, and the much higher rates they’d need to pay on a loan for their next home,’’ says wanyumba senior economist Jeff Tucker. “This ‘rate lock-in’ effect has helped to essentially freeze the existing-home sales market.”

The pool of for-sale homes expanded slightly, by just 0.2%, from August to September, mostly because sales have slowed and homes are taking a bit longer to sell, Tucker says. That tiny uptick likely represents the peak of inventory for the year, he says, which means that buyers looking for fresh pickings aren’t likely to see a surge of inventory until next spring, when most sellers usually list their homes.

That’s where new construction comes in. 

Builder incentives can lower monthly mortgage costs

With a dearth of existing homes for sale, builders have stepped up production, and the sales of new homes started to rebound in early 2023, Tucker says.

In August, builders completed new homes at an annualized rate of 1.4 million homes, according to U.S. Census data. They also started an annualized 1.28 million more and took out building permits for another 1.54 million (annualized), the data shows.

Along with a steady flow of new homes, builders have been able to offer incentives that can lower the cost of buying and owning a home.

The incentives have included: 

• creative financing, including paying for lower interest rates, that lower monthly mortgage costs

• paying for closing costs
• offering builder warranties
• upgrading finishes for free or at a discount 
• price discounts at the start or completion of a development

Higher interest rates have made it harder for builders to buy down rates to the point where it becomes affordable for more would-be buyers, Tucker says. But, “most forecasters do not expect mortgage rates to go much higher or stay this high in the long run,’’ he says, “so everyone is trying to invest to be ready to hit the gas when rates start to fall, bringing more buyers back to the table.”

There is room for optimism

If a new build is out of the picture for you, know this: “there are reasons for optimism for today’s home shoppers,” Bachaud says. “This year’s seasonal cooldown has come about faster than usual. More sellers are cutting their list price and fewer bidding wars are breaking out, which could present an opportunity for home shoppers with room in their budget to manage higher mortgage rates by regaining some negotiating power.”

And the incentives still being offered can make new construction more affordable on a monthly basis than existing homes.

What’s more, Tucker says about 24% of listings had price cuts in September, the highest share since last November, and more elevated than in any month before 2022. 

“This is a big sign that buyers’ willingness to pay has shrunk more than sellers were expecting, and sellers are needing to adapt to meet buyers halfway,’’ he says.

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