Builders Are Cutting Prices & Offering Incentives, But It’s Not 2008


In November of 2022, 36 percent of single-family home builders reported reducing their prices, and 59 percent were offering special sales incentives.  These percentages may seem relatively high—and in fact they have increased significantly since July of this year—but they are nowhere near as high as they were during the 2007-2008 financial crisis. Questions on sales incentives have been a regular topic on the monthly survey for the NAHB/Wells Fargo Housing Market Index (HMI) since the 1990s.  The questions on price reductions were introduced during the financial crisis and have been revisited several times since then. In July of 2022, 13 percent of builders reported that they had reduced home prices during the past month to bolster sales volume and/or limit cancellations.  This subsequently increased to 19 percent in August, 26 percent in September, and 36 percent in November.  Even at 36 percent, however, the current percentage doesn’t seem terribly high compared to May 2007 through March of 2008, when the share of builders cutting prices was consistently 48 percent of higher—as high as 59 percent in October of 2007. Among builders who did reduce their home prices, the average reduction was 5 percent in July of 2022, and 6 percent in the three surveys conducted since then.  In the 2007-2008 crisis period, however, the average monthly reduction in house price was consistently 7 percent or higher—as high as 10 percent in February of 2008. Sales incentives (price discounts, free upgrades, etc.) have long been a standard part of the business for some home builders.  On the other hand, some builders never offer these types of  incentives—either because they are pure custom builders, rely on word of mouth for marketing, prefer to let their customer make the first offer, or otherwise have business models they deem incompatible with incentives. .When the question was first asked In May of 1995, 74 percent of builders reported offering sales incentives.  The percentage never fell below 50 until July of 2022, when it dipped to 43.  Although many builders offer incentives as a matter or routine, the share does fluctuate somewhat in response to market conditions.  During the latter part of 2022, the share of builders offering incentives increased from 43 percent in July to 53 percent in September and 59 percent in November.  In the 2007-2008 crisis period, however, the share offering incentives was usually well over 70 percent—as high as 86 percent in December of 2008. In November of 2022, five specific types of sales incentives were particularly common, several of them directly related to housing finance: discounting home prices/reducing margins, paying closing costs or fees, offering options or upgrades at no or reduced cost, mortgage rate buy-downs, and absorbing financing points for the buyers.  The full list is shown below: Some reduction in new home prices and increased use of incentives is what we would expect, given the current economic environment of rising interest rates, declining  prices on existing homes,  weakening builder confidence, and contracting production of new housing .   However, many more builders were offering incentives and cutting house prices (and the cuts were deeper) during the severe housing downturn of 2007 and 2008. Related ‹ U.S. Added 263,000 Jobs in NovemberTags: economics, home building, housing, incentives, price cuts, price reductions

Builders Are Cutting Prices & Offering Incentives, But It’s Not 20082022-12-05T15:18:42-06:00

AD&C Balances Continue to Rise


By Robert Dietz on December 1, 2022 • Residential construction loan volume reached a post-Great Recession high during the third quarter of 2022, as home building activity and new home sales remained weak. Outstanding builder loan balances are rising as development debt is being held longer as new homes remain in inventory longer. Loan balances will decline in coming quarters as the development loan market becomes more costly and tighter given higher interest rates. This is a reminder that tighter monetary policy affects not only housing demand but housing supply as well. The volume of 1-4 unit residential construction loans made by FDIC-insured institutions increased more than 5% during the third quarter. The volume of loans increased by $5.5 billion on a quarterly basis. This loan volume expansion places the total stock of home building construction loans at $102.6 billion, a post-Great Recession high. On a year-over-year basis, the stock of residential construction loans is up 18%. Since the first quarter of 2013, the stock of outstanding home building construction loans has grown by 151%, an increase of more than $61 billion. It is worth noting the FDIC data represent only the stock of loans, not changes in the underlying flows, so it is an imperfect data source. Lending remains much reduced from years past. The current amount of existing residential AD&C loans now stands 50% lower than the peak level of residential construction lending of $204 billion reached during the first quarter of 2008. Alternative sources of financing, including equity partners, have supplemented this capital market in recent years. The FDIC data reveal that the total decline from peak lending for home building construction loans continues to exceed that of other AD&C loans (nonresidential, land development, and multifamily). Such forms of AD&C lending are off a smaller 21% from peak lending. For the second quarter, these loans posted a 3.7% increase. Related ‹ October Private Residential Spending FallsTags: ADC, economics, home building, housing

AD&C Balances Continue to Rise2022-12-01T14:18:15-06:00

Construction Job Openings Peaked for Cycle?


The count of open, unfilled jobs for the overall economy declined in October, falling from 10.7 million open positions to 10.3 million. This represents a small decrease from a year ago (11.1 million), a sign the labor market is slowing in response to tighter monetary policy. The degree of this slowing will be critical for a potential downshift in the size of rate hikes from the Fed at future meetings. Ideally, the count of open, unfilled positions slows to the 8 million range in the coming months as the Fed’s actions cool inflationary pressures. While higher interest rates are having an impact on the demand-side of the economy, the ultimate solution for the labor shortage will not be found by slowing demand, but by recruiting, training and retaining skilled workers. The construction labor market saw a decline for job openings in October as the housing market cools. The count of open construction jobs decreased from 423,000 to 371,000 month-over-month. The October reading is only slightly lower than the estimate from a year ago (392,000), a reminder of the persistent challenges of the skilled labor crisis in construction. The construction job openings rate declined, falling to 4.6% from 5.2% in September. The data series high rate of 5.5% was recorded in April. Given the outlook for construction, it is possible that the count of open, unfilled positions for the construction industry has already peaked for this cycle. The housing market remains underbuilt and requires additional labor, lots and lumber and building materials to add inventory. However, the market is slowing due to higher interest rates. Nonetheless, hiring in the construction sector weakened somewhat to a 4.3% rate in October. The post-virus peak rate of hiring occurred in May 2020 (10.4%) as a post-covid rebound took hold in home building and remodeling. Construction sector layoffs fell back to a 1.7% rate in October. In April 2020, the layoff rate was 10.8%. Since that time, the sector layoff rate has been below 3%, with the exception of February 2021 due to weather effects. The number of layoffs in construction fell back to 134,000, compared to 138,000 a year ago. The number of quits in construction in October (189,000) was equal to the measure a year ago (189,000). Looking forward, attracting skilled labor will remain a key objective for construction firms in the coming years. However, while a slowing housing market will take some pressure off tight labor markets, the long-term labor challenge will persist beyond an ongoing macro slowdown. Related ‹ Home Prices Continue to Decline in SeptemberTags: economics, home building, housing, JOLTS, labor market

Construction Job Openings Peaked for Cycle?2022-11-30T12:17:46-06:00

New Home Sales Increase in October


By Danushka Nanayakkara-Skillington on November 23, 2022 • New home sales rebounded in October despite higher mortgage rates, likely due to low existing home inventory and builders using incentives to attract buyers to the new home market. The U.S. Department of Housing and Urban Development and the U.S. Census Bureau estimated sales of newly built, single-family homes in October at a 632,000 seasonally adjusted annual pace, which is a 7.5% increase over downwardly revised September rate of 588,000 and is 5.8% below the October 2021 estimate of 671,000. Sales-adjusted inventory levels are at an elevated 8.9 months’ supply in October. However, only 63,000 of the new home inventory is completed and ready to occupy. This count has been increasing in recent months and is up 75.0% compared to a year ago. Homes under construction accounts for 63.8% of the inventory. Moreover, sales are increasingly coming from homes that have not started construction, with that count up 13.7% year-over-year, not seasonally adjusted (NSA). The median sales price increased to $493,000 in October, up 8.2% compared to September and is up 15.4% compared to a year ago. In October there were 23,000 homes that were priced above $500,000 compared to 17,000 a year ago. Nationally, on a year-to-date basis, new home sales are down 14.2% for the first ten months of 2022. Regionally, on a year-to-date basis, new home sales fell in all four regions, down 4.8% in the Northeast, 22.0% in the Midwest, 11.8% in the South, and 17.9% in the West. Related ‹ Small Increase for Missing Middle MultifamilyTags: economics, home building, housing, new home sales, sales, single-family

New Home Sales Increase in October2022-11-23T11:19:34-06:00

97% Built-for-Rent Multifamily Construction Share


By Robert Dietz on November 22, 2022 • According to NAHB analysis of quarterly Census data, the count of multifamily, for-rent housing starts remained elevated during the third quarter of 2022. At 141,000 units started, this was the largest quarter for rental multifamily construction since the second quarter of 1986. The market share of rental units of multifamily construction starts increased to 97% as the already small condo market retreated on higher interest rates. In contrast, the historical low share of 47% was set during the third quarter of 2005, during the condo building boom. An average share of 80% was registered during the 1980-2002 period. For the third quarter, there were just 4,000 multifamily condo construction starts. This is just half the total from a year ago. An elevated rental share of multifamily construction is holding typical apartment size below levels seen during the pre-Great Recession period. According to third quarter 2022 data, the average square footage of multifamily construction starts ticked up to 1,092. The median declined to 998 square feet. Related ‹ New Single-Family Home Size Trending LowerTags: economics, home building, housing, mfbfr, multifamily, multifamily size

97% Built-for-Rent Multifamily Construction Share2022-11-22T10:20:33-06:00

Flat Readings for Single-Family Built-for-Rent


Single-family built-for-rent construction leveled off during the third quarter of 2022 as the overall housing market slowed. This occurred after an exceptionally strong second quarter for rental housing production. According to NAHB’s analysis of data from the Census Bureau’s Quarterly Starts and Completions by Purpose and Design, there were approximately 16,000 single-family built-for-rent (SFBFR) starts during the third quarter of 2022. This is 6% lower compared to the third quarter 2021 total. Over the last four quarters, 68,000 such homes began construction, which is a 42% increase compared to the 48,000 estimated SFBFR starts in the prior four quarters. The SFBFR market is a source of inventory amid challenges over housing affordability and downpayment requirements in the for-sale market, particularly during a period when a growing number of people want more space and a single-family structure. Single-family built-for-rent construction differs in terms of structural characteristics compared to other newly-built single-family homes, particularly with respect to home size. Given the relatively small size of this market segment, the quarter-to-quarter movements typically are not statistically significant. The current four-quarter moving average of market share (6%) is nonetheless higher than the historical average of 2.7% (1992-2012) and sets a data series high as this submarket expands. Importantly, as measured for this analysis, the estimates noted above only include homes built and held by the builder for rental purposes. The estimates exclude homes that are sold to another party for rental purposes, which NAHB estimates may represent another five percent or higher of single-family starts based on industry surveys. Indeed, the Census data notes an elevated share of single-family homes built as condos (non-fee simple), with this share averaging 4% over recent quarters. Some, but not all, of these homes will be used for rental purposes. Additionally, it is theoretically possible some single-family built-for-rent units are being counted in multifamily starts, as a form of “horizontal multifamily,” given these units are often built on single plat of land. However, spot checks by NAHB with permitting offices indicate no evidence of this data issue occurring at scale thus far. With the onset of the Great Recession and declines for the homeownership rate, the share of built-for-rent homes increased in the years after the recession. While the market share of SFBFR homes is small, it has clearly been trending higher. As more households seek lower density neighborhoods and single-family residences, a growing number will do so from the perspective of renting. This will be particularly true as mortgage interest rates remain elevated and increase. Thus, the SFBFR market will expand in the quarters ahead. Related ‹ Multifamily Developer Confidence Declines Significantly in the Third QuarterTags: economics, home building, housing, SFBFR, single family built for rent, single-family

Flat Readings for Single-Family Built-for-Rent2022-11-17T11:19:57-06:00

Credit Conditions for Builders and Developers Continue to Worsen


During the third quarter of 2022, credit continued to become less available and generally more costly on loans for Acquisition, Development & Construction (AD&C) according to NAHB’s Survey on AD&C Financing. To analyze credit availability, responses from the NAHB survey are used to construct a net easing index, similar to the net easing index based on the Federal Reserve’s survey of senior loan officers (SLOOS).  In the third quarter of 2022, both the NAHB and Fed indices were negative, indicating tightening credit conditions.  This was the third consecutive quarter during which indices from both surveys indicated tighter credit.  Moreover, both indices were more negative in the third quarter than they had been in the second, and far more negative than they had been in the first.  In the first quarter of the year, the NAHB net easing index stood at -2.3 before declining to -21.0 in the second quarter and  -36.0 in the third.  Similarly, the Fed net easing index was -4.7 in the first quarter of 2022, but subsequently fell to -48.4 in the second quarter and -57.6 in the third.  In short, the tightening of credit conditions for builders and developers is becoming more widespread. According to the NAHB survey, the most common ways in which lenders tightened in the third quarter were by increasing the interest rate on the loans (cited by 74 percent of the builders and developers who reported tighter credit conditions), reducing amount they are willing to lend (60 percent) and lowering the allowable Loan-to-Value or Loan-to-Cost ratio (46 percent). Meanwhile, the average effective rate (based on rate of return to the lender over the assumed life of the loan taking both the contract interest rate and initial fee into account) increased on three of the four categories of loans tracked in the AD&C Survey: from 9.55 to 9.67 percent on loans for land development, from 8.48 to 9.95 percent on loans for speculative single-family construction, and from 8.63 to 10.76 percent on loans for pre-sold single-family construction. These increases were due to increases in both the contract interest rate and the initial points charged on the loans.  The average contract rate increased from 6.27 to 6.42 percent on loans for land development, from 5.39 to 6.16 percent on loans for speculative single-family construction, and from 5.24 to 5.85 percent on loans for pre-sold single-family construction.  Similarly, average points increased from 0.90 to 0.93 percent on loans for land development, from 0.63 to 0.76 percent on loans speculative single-family construction, and from 0.59 to 0.89 percent on loans for pre-sold single-family construction. On the fourth category of loans in the AD&C survey (for pure land acquisition) the average effective rate declined slightly, from 8.19 percent to 7.97 percent.  Again, this was due to a combined effect of the contract rate and points on the loans moving in the same direction.  The average contract rate on land acquisition loans declined from 6.16 to 6.09 percent, while the average points declined from 0.86 to 0.79 percent. These generally worsening credit conditions are contributing to the weakness in builder confidence reported by NAHB earlier today.  Additional detail on current credit conditions for builders and developers is available on NAHB’s AD&C Financing Survey web page. Related ‹ Builder Confidence Declines for 11 Consecutive Months as Housing Weakness ContinuesTags: ad&c lending, ad&c loans, ADC, construciton loans, construction lending, credit conditions, economics, home building, housing, interest rates, lending

Credit Conditions for Builders and Developers Continue to Worsen2022-11-16T12:17:02-06:00

Patios Continue to Substitute for Decks on New Homes


As a previous post has shown, the share of new homes with patios increased for the sixth year in a row in 2021, to a post-2004 high of 63.0 percent  At the same time, the share with decks was trending in the opposite direction, declining for the fifth year in a row to a post-2004 low.  Of the roughly 1.1 million single-family homes started in 2021, only 17.5 percent included decks, according to NAHB tabulation of data from the Survey of Construction (SOC, conducted by the U.S. Census Bureau and partially funded by HUD).  As noted above, this is the lowest the new home deck percentage has been since the 2005 re-design of the SOC and indicates that, over time, patios and decks have functioned as substitutes for each other. The 2021 SOC data also indicate that decks and patios tend to function as substitutes for each other geographically.  Across the nine Census divisions, the correlation between the percentages of new homes with decks and patios was  -.81.  The share of new homes with decks was at its lowest in the West South Central and South Atlantic divisions (7 and 13 percent, respectively), the same two divisions where the share of new homes with patios was at its highest (over 70 percent). Decks on new homes nevertheless remain relatively popular in certain parts of the country.  For example, over 60 percent of new homes in New England came with decks in 2021, followed by 47 percent in the West North Central and 41 percent in the Middle Atlantic.  The New England and Middle Atlantic divisions are also the two divisions where patios on new homes are least common.  The West North Central, however, stands out as the one division where the shares of new homes with decks and patios are both reasonably high (around 45 percent), providing the best evidence that the negative correlation between decks and patios, while quite strong at -.81, is not perfect. The SOC data provide information about the number of new homes with decks, but not much detail beyond that.  However, considerable information about the type of decks on new homes is available from the Annual Builder Practices Survey (BPS) conducted by Home Innovation Research Labs. For the U.S. as a whole, the 2022 BPS report (based on homes built in 2021) shows that the average size of a deck on a new single-family home is 296 square feet.  Across Census divisions, the average deck size ranges from a low of about 253 square feet in the West North Central and South Atlantic divisions to 456 square feet in the West South Central. The latest BPS also shows that composite (a mixture of usually recycled wood fibers and plastic) has moved ahead of treated wood as the material used most often in new home decks. Related ‹ Inflation Shifts to Slowest Pace Since JanuaryTags: BPS, builder practices survey, composite, decks, economics, home building, housing, patios, SOC, survey of construction

Patios Continue to Substitute for Decks on New Homes2022-11-14T08:18:25-06:00

Concentration of Large Builders in Metropolitan Markets- Update (2021)


NAHB analysis of information published in Builder Magazine’s annual Local Leaders lists shows that large builders gained market share across all tiers on average from 2009 to 2021 in major housing markets; market concentration, as calculated with top four firms in a metropolitan statistical area (MSA), has also increased, but has leveled off over the last four years. Figure 1 shows the annual average of the four statistics produced by NAHB for this analysis, which showcases how these averages changed during the years following the Great Recession. For reference, the Great Recession occurred between December 2007 and June 2009 according to the National Bureau of Economic Research (NBER). All four percentages have increased since the trough of the Great Recession. The four firm concentration ratio started at 30.1% in 2009, peaked in 2020 at 43.7%, and declined slightly to 43.0% in 2021. The large national builders grew their market shares from 30.5% in 2009 to its current peak of 48.4% in 2021. The market share for all national builders went up from 33.8% in 2009 to its current peak of 53.6% in 2021. National and regional builders increased their collective market share on average from 37.3% in 2009 to its peak of 57.5% in 2021. NAHB calculated the percentage for all four statistics for the most recent year available (2021) by MSA. As an example, Figure 2 shows the MSAs in 2021 with the highest large national builder market shares. For reference, the average large national builder market share for all the analyzed MSAs in 2021 is 48.4%. Las Vegas-Henderson-Paradise, NV had the largest national builder share at 82.9% for 2021. This is unsurprisingly when analyzing the Local Leaders data for this MSA. Nine of the top 10 builders for Las Vegas-Henderson-Paradise, NV are classified as Tier 1 (i.e., 3,000+ closings); this share composition is true for Riverside-San Bernardino-Ontario, CA as well. NAHB also calculated the percentage change of these four statistics to understand how the COVID-19 pandemic affected each one and which companies “moved the needle” the most within MSAs. As an example, Figure 3 shows the large national builder market shares in 2019 and 2021 along with top five and bottom five MSAs by percent change. Colorado Springs, CO saw the largest positive percent change in large national builder market share, growing over five-fold from 3.7% in 2019 to 19.1% in 2021. All MSAs within the top five have a large national builder market share of less than 50%. Atlanta-Sandy Springs-Alpharetta, GA experienced the largest negative percent change, falling 12.2% from over 42.5% in 2019 to 37.3% in 2021. Interestingly, both MSAs in Colorado saw noticeable shifts among specific large national builders. Most of the increase in large national builder market share for Colorado Springs, CO came from the introduction of 2 firms in 2021 to the market: Clayton Properties (9.8%, or 407 closings) and D.R. Horton (3.0%, or 123 closings). M.D.C. Holdings previously had a strong presence within Colorado Springs, CO but fell out of the top ten starting in 2015; however, they have remerged in 2021, achieving a market share of 3.2%, or 131 closings, and ranked 8th. As for Greeley, CO, D.R. Horton (+5.6 percentage points to 16.7%, or 630 closings) and LGI Homes (+7.7 percentage points to 11.3%, or 425 closings) were the largest drivers of their increases in large national builder market shares. For a more detailed description of NAHB’s analysis of MSA builder market shares and concentration along with further insights, click on the link to access the full report where you will find MSA rankings for each of the four statistics, both for 2021 and percentage change from 2019 to 2021, and additional concentration analysis. Related ‹ Labor Market Softens in OctoberTags: builder concentration, COVID-19, economics, home building, housing, market share, Metropolitan Statistical Area, recession

Concentration of Large Builders in Metropolitan Markets- Update (2021)2022-11-07T08:18:28-06:00

Share of Young Adults Living with Parents Declined in 2021


By Natalia Siniavskaia on November 4, 2022 • Spurred by elevated savings early in the pandemic and encouraged by lower interest rates, rising numbers of young adults left parental homes in 2021. As a result, the share of young adults ages 25-34 living with parents or parents-in-law declined and now stands at 20.2%, according to NAHB’s analysis of the 2021 American Community Survey (ACS) Public Use Microdata Sample (PUMS). This is a substantial change and welcome reversal of the troublesome trend we have been tracking since the housing boom and bust of the mid-2000s. Traditionally, young adults ages 25 to 34 make up around half of all first-time homebuyers. Consequently, the number and share of young adults in this age group that choose to stay with their parents or parents-in-law has profound implications for household formation, housing demand and the housing market.The share of adults ages 25 to 34 living with parents reached its peak of 22% in 2017-2018. Even though an almost 2 percentage point drop in the share since then is a welcome development that the housing market has been waiting for, the share remains elevated by historical standards, with one in five young adults remaining in the parental homes. Two decades ago, less than 12% of young adults ages 25 to 34, or 4.6 million, lived with parents. The current share of 20.2% translates into 8.9 million of young adults living in homes of their parents or parents-in-law. Undoubtedly, the Covid-19 pandemic heightened the desire for more spacious, independent living. The “excess” savings accumulated early in the lockdown stages of the pandemic, when spending opportunities were limited, gave a financial boost to young adults who remained employed and helped with down payments for a house for those looking into homeownership. The low mortgage rate environment further helped making home ownership affordable. Stacking our estimates of the share of young adults living with parents against NAHB/Wells Fargo’s HOI data confirms that the rising share of young adults living with parents is associated with worsening affordability while improving housing affordability coincides with the declining share of 25-34 year old adults continuing to live in parental homes. Given the historically high nature of the recent interest rate hikes and inflation rates, it is doubtful the recent gains in independent living by adults ages 25-34 can be sustained in 2022 and near future. Related ‹ Number of Bathrooms in New Homes in 2021Tags: headship rates, housing, housing affordability, young adults living with parents

Share of Young Adults Living with Parents Declined in 20212022-11-04T08:19:16-05:00

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