introduction

Spring is here across the United States, and with it comes the beginning of construction season. But builders may have a bit of whiplash after an up-and-down 2022 market for new homes.

Trends

Permits, Starts, and Deliveries

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Permits and starts decreased slightly in 2022, as builders slowed down their single-family builds
when they saw home prices peak. Projections indicate another dip in 2023.
Multifamily starts and permits increased by double-digit percentages in 2022 while single-family
starts dipped, but projections indicate both will decrease in 2023.
Meanwhile, total deliveries were up in 2022, based on the building frenzy of 2021.
We can expect that number to decline in 2023 based on the 2022 permit/start numbers.

Trends

Material Prices

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While construction material prices have increased dramatically since the beginning of the pandemic, builders have seen some recent declines despite overall inflation.
60% of builders expect increases from the current prices in 2023, according to ProBuilder, but the
numbers don’t indicate that has happened yet.

Trends

Sales Outlook

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Builders are adjusting supply by reducing starts, and this seems to provide a healthy
balance against lower demand caused by the interest rate environment.
With consumer sentiment toward housing remaining well below pre-pandemic
levels, according to Fannie Mae, this lower supply approach gives the builders the
best chance at per-build profit.
On the whole, most builders are optimistic that they will be able to sell the homes
they complete in 2023 at a reasonable price.

Not only do an overwhelming percentage of the respondents to Pro Builder’s annual Housing Forecast Survey think
they will sell more homes and generate more revenue, but
nearly 70 percent rate the overall health of their companies
today as ‘good’ or ‘very good,’ and roughly half expect 2023
to be a ‘very good’ or ‘excellent’ year. —

Howard Zelin

The Takeaways

FOR BUILDERS

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So what should investors take away from these stats and trends? It’s hard to make one blanket
statement, because the outlook is mixed. But here’s what we’re confident in saying.

BUILDERS ARE NOT AS CONFIDENT AS THEY WERE A YEAR AGO.

Builder sentiment is down. This makes sense, because builders face more
challenges in selling properties than they did in 2021-22, when over-asking multiple
offer scenarios were common. It is going to take a little more work to sell properties
than it did a year ago.

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DEMAND IS STILL SOLID

While builders may wish for the seller’s market of 2021-22, they should recognize that
demand is still there. Numbers like household formation and inventory on market
indicate a critical mass of buyers who would like to purchase new builds.

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INTEREST RATES ARE SLOWING THE MARKET

While demand is present, the higher interest rate environment of 2023 is limiting the
number of people who can actually afford a new home purchase—especially at
higher price points. Some builders have turned to interest-rate buydown incentives,
which can help overcome buyer sticker shock when they look at mortgage payments.

The Takeaways

CONTINUED

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BUILDERS ARE PIVOTING FROM SPEC HOMES TO PRE-SOLD HOMES

In 2021-22, spec homes were easy wins for builders, because home prices continued
rising throughout the build process. That let the builders get maximum prices for the
builds. But now, as home prices are flat nationwide and down in some formerly hot
markets, builders are turning from spec to pre-sold builds to limit risk and ensure
disposition. That takes out some upside potential on home prices, but it also ensures
the builder will have a profitable exit on a deal.

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THE MARKET IS FUNDAMENTALLY SOLID

All in all, the new construction market is solid. It may not be stable, with all the
stats on home prices, materials prices, and interest rates are still prone to vary in 2023.
But the overall fundamentals are in place for builders to succeed and profit. Yes, the
massive profit potential of previous years may not be there, but there’s plenty of
money to be made from new home sales and new home starts across the market
in 2023.

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Howard Zelin