Market Health June 14, 2024

Homebuilders Aren’t Overbuilding – They’re Catching Up

You might have heard that the number of brand-new homes available right now is higher than usual. Currently, about one in three homes on the market is newly built. If you’re curious about what this means for the housing market and your own move, here’s what you need to know.

People remember what happened to the housing market in 2008, when one of the factors contributing to the crash was an excess of homes for sale. Although only a portion of that oversupply came from builders, the lasting impact is that some people still feel uneasy when they hear that new home construction has increased.

The graph below, using data from the Census, illustrates the number of new houses built over the past 52 years. After the crash in 2008, there was a prolonged period of underbuilding (indicated in red). It wasn’t until recently that we finally reached the long-term average for the number of homes built in a typical year.

This demonstrates that, even with the recent increase in new builds, there won’t be an oversupply of homes for sale. The gap left by over a decade of underbuilding is too large to close quickly. And if you’re still concerned that builders are overdoing it, here’s something else that should reassure you.

New Home Construction May Be At Its Peak For The Year

The latest data from the Census on housing starts (homes where builders have just broken ground) and permits (homes where builders can start development soon) shows that builders are currently slowing down their pace. Why is that?

They’re responding to still-high mortgage rates and the impact those rates are having on buyer demand. Essentially, they are appropriately adjusting their activity in response to market conditions. As an article from HousingWire explains:

“Even with a massive housing shortage across the nation, homebuilders are completing their pipelines and not seeking as many permits to construct new single-family houses.” 

You May Have More Opotions Now vs Later

If you’re considering a newly built home, here’s how this impacts you: with builders seeking fewer permits and breaking ground on fewer new homes, we may be at the peak of new home construction for the year. This doesn’t mean new home construction is coming to a halt—just that the pace is slowing down, which will affect what comes to market later this year. As Lawrence Yun, Chief Economist at the National Association of Realtors (NAR), says:

“Given the recent declines in housing starts, home completions will steadily show declines in about six months.”

The Bottom Line

While it’s true that new home construction is a larger segment of the market than usual, this isn’t a bad thing. Builders aren’t overbuilding; they are responding to market signals to avoid repeating the mistakes made in 2008.