Why a ‘Dolden Age of Homebuilding’ Is Coming
A segment of the housing market is headed for even better days, thanks to a coming “golden age” of new home construction, according to Howard Hughes CEO David O’Reilly.
The real estate veteran pointed to the rise in home building activity and new home sales this year. New-home sales jumped 18% year-per-year in October, according to US Census data, rising to a seasonally-adjusted pace of 679,000. Privately-owned home building permits, meanwhile, rose 4% year-per-year to a pace of 1.4 million in November.
The increase in new-home demand is partly because buyers are able to customize their units, as opposed to buying an existing home. Homebuilders are also offering attractive discounts for buyers, like mortgage rate buydowns. That involves homebuilders offering thousands of dollars in upfront payment, which serve as “discount points” to reduce the mortgage rate on a new home.
“The new home market has been extraordinary in 2023, and I think heading into 2024, we’re going to have the golden age of new home construction,” O’Reilly said in an interview with CNBC on Wednesday. “Because not only can you pick size, location … but national home builders have been able to buy down mortgage rates and offer a lower mortgage rate for buyers,” he added.
On average, homebuilders are buying down mortgage rates 150 to 200 basis points, O’Reilly said. With the average 30-year fixed mortgage rate hovering around 7%, that implies rates as low as 5% for some new homes on the market — a major perk for buyers looking to avoid high borrowing costs.
High mortgage rates have put the existing home market in a precarious position, with existing home sales staying mostly frozen over the last year. That’s because elevated borrowing costs have discouraged existing homeowners from listing their properties for sale, as many are looking to cling onto the ultra-low mortgage rates at which they financed their home years ago.
O’Reilly expects that trend to continue as mortgage rates tread lower next year. Lower mortgage rates will increase the incentive to build new homes, but rates aren’t falling enough to unlock existing home inventory, he warned, suggesting the existing home market will stay at a standstill.
“That supply-demand imbalance should get worse into 2024, driving demand for new home construction,” O’Reilly added.
Rates would need to fall to around 5% to unleash a wave of existing home inventory, some housing experts have said. Most real estate economists, though, see mortgage rates only easing slightly into next year. Redfin, for instance, is forecasting the 30-year fixed mortgage rate to fall to just 6.6% by the end of 2024.