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The mixture of (relatively) high rates of interest and economic volatility with the actual fact most householders have fixed, low-interest rate debt had induced what real estate economist Bill McBride refers to because the “sellers strike.” As needs to be expected on the heels of such stubbornness, developers are starting a “builders strike” to follow suit.

As CNBC reported at the top of October, “Housing starts for single-family homes dropped nearly 19% 12 months over 12 months in September, in response to the U.S. Census. Constructing permits, that are an indicator of future construction, fell 17%. PulteGroup, one in every of the nation’s largest homebuilders, reported its cancelation rate jumped from 15% within the second quarter of this 12 months to 24% within the third.”

Rick Palacios Jr., the director of research at John Burns Real Estate Consulting, has an interesting thread on builder sentiments from across the county. It’s not exactly good.

Home builder commentary from our survey this month was about as negative as I’ve seen so far. Here’s a few of the market color that jumped out…

— Rick Palacios Jr. (@RickPalaciosJr) November 9, 2022

A couple of samples include a builder in Boston saying, “October was exceptionally weak,” in Baltimore, “The market is terrible,” and in Wilmington, “The market is falling off a cliff,” etc. 

You get the thought.

Overall, single-family housing starts are falling rapidly. Nevertheless, multifamily housing starts are, somewhat surprisingly, remaining relatively stable. It’s likely that multifamily constructing is propped as much as a certain extent by government-subsidized LIHTC projects, but even still, they may likely decrease soon.

Housing Starts, Single and a pair of+ Unit Structures – Calculated Risk

In fact, a serious slowdown in constructing is to be expected. Latest construction is at all times heavily depending on rates of interest, and the Federal Reserve has brought the discount rate that underlies the mortgage market from 0.25% to 4.5% in lower than a 12 months. 

The rationale the true estate market is unlikely to collapse is because, unlike in 2008, homeowners have low-interest fixed-rate debt, lending standards are relatively strong, and most have a good amount of equity of their homes. Absolutely none of that has anything to do with the calculus developers use when deciding whether to construct a property. In other words, the basics holding up the housing market don’t apply to the market for brand new construction. Thereby, recent construction is falling drastically and will possibly collapse. 

In other words, the builders are frustrated, and so they are occurring strike.

Nevertheless, they’ll’t achieve this before ending and liquidating what could develop into a minor boondoggle within the American economy: a brand new construction glut.

The Coming Latest Construction Glut

Already, a record 29% of homes on the market in the USA are recent construction. Buyer cancellations increased 7.5% for brand new builds from September to October and showed no signs of abating. Months of inventory for brand new construction have increased over 50% from January of 2022 to October, from 5.7 months to eight.9 months. (Generally, six months of inventory is taken into account a balanced market). 

And while the period of time it takes to sell recent houses has typically outpaced existing inventory, the gap between the 2 has develop into quite pronounced. In October, there have been only 3.3 months of inventory for existing inventory (still a seller’s market), only one-third of what it was for brand new construction.

Monthly Supply of Latest Homes and Existing Single-Family Home Sales by way of Months Supply – St. Louis Federal Reserve

Unfortunately, there’s no real reason to consider that is going to recover before it gets worse. While inflation has cooled a bit, the Fed has indicated they plan to maintain rates high (relatively speaking) a minimum of through 2023. 

But possibly more importantly, as Bill McBride points out, there are more housing units under construction now than there ever have been before! 

Housing Units Under Construction – Calculated Risk

“Red is single-family units. Currently, there are 794 thousand single-family units (red) under construction…Blue is for two+ units. Currently, there are 928 thousand multifamily units under construction. That is the very best level since December 1973!”

“Combined, there are 1.722 million units under construction. That is the all-time record variety of units under construction.”

The rise in construction was largely resulting from the nationwide housing shortage, which is predominantly what fueled skyrocketing housing prices over the previous couple of years. Along with that, supply chain issues have delayed many projections causing a backlog of properties to stay under construction longer than was intended.  

Unfortunately, unlike homeowners who’re rarely compelled to sell, builders have little selection. Sure, many will turn to rent these recent builds, however the rental market is already beginning to develop into saturated. For many, they’ll don’t have any selection but to sell in what’s a buyer’s market and what’s prone to develop into substantially more of 1.

Conclusion

With notable exceptions (most notably that which is government-subsidized, like LIHTC), it’s probably not the very best time to start out recent development projects. For those who are a developer in the course of such a brand new construct, it might be value a minimum of considering if it’s economically feasible to rent the property (or a few of the properties if developing a subdivision). 

If selling is the one option, it might be clever to get ahead of the curve. While existing home prices probably will only fall a moderate amount over the following 12 months, recent home prices will likely sink substantially more. You don’t wish to be caught chasing the market downward whilst you hold onto inventory. I’d recommend leading the market and cutting your price upfront. Offering attractive incentives, equivalent to interest-rate buy-downs (where the builder pays the lender to lower the rate of interest for the client in the primary 12 months or more), must also be something to contemplate. 

Every investor and developer will take hits on this business sooner or later or one other. It’s higher to return to terms with that now than attempt to hold out hope which you could sell at the identical price you may have when the everyday homeowner was buying with rates of interest within the 3% range. To hope the market shifts back to what it was six months ago will likely leave you holding the bag as holding costs eat away any profit you may have made. And after that, you’ll likely must eventually sell for even lower than the discount you may have offered upfront.

Then again, should you wish to buy a house—particularly one to live in—and are frustrated with this meme being far closer to reality than such a buyer would like:

Latest homes could be something to look into. Particularly search for one’s offering rate buy downs. Either way, you will definitely have the upper hand in negotiations.

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Note By BiggerPockets: These are opinions written by the writer and don’t necessarily represent the opinions of BiggerPockets.