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What Slowing New Home Construction Means for the Housing Market

Thursday, May 18, 2017

By Clare Trapasso,

Although more home buyers are eagerly seeking the dwellings of their dreams, fewer new homes are in bloom this spring.

In not-so-promising signs for the housing market, permits to build new abodes, housing starts, and the number of new homes completed dipped in April from the previous month, according to the seasonally adjusted numbers in the latest residential sales report. The report is jointly released by the U.S. Census Bureau and the U.S. Department of Housing and Urban Development.

(Seasonally adjusted numbers means they have been smoothed out to account for fluctuations over a 12-month period.)

However, the numbers of new permits, housing starts and finished homes hitting the market were all up year-over-year in April, according to the report. Housing starts are construction projects that have been started for new residences.

“Unfortunately, it is not enough to stem the steady decline of the number of homes on the market,” says senior economist Joseph Kirchner. “The drop (in construction) results in increasing prices on homes and, in some markets, bidding wars.”

It's too early to tell whether the slowdown is temporary or will continue, worsening the housing shortage.

“There's not enough homes on the market, and the shortage of homes is most pronounced at the low end of the price range,” Kirchner says. “As prices continue to rise, Millennials and households with low and moderate incomes will find it more difficult to take the home ownership plunge.”

The number of new permits authorized, a strong indicator of how many new homes will be built over the next few months, dropped 2.5% from March to April to hit 1.23 million, according to the report. However, builders received 5.7% more permits in April than they did in the same month a year earlier.

The most permits were issued in the South, at about 577,000. More homes are going up in the region, where land and labor are still available at reasonable prices and the low cost of living and lower taxes are luring businesses and new residents. However, the number of permits for new homes was down 7.4% from March and represented a 0.5% dip from April 2016.

Builders received about 336,000 permits in the West, up 8.7% from March and an impressive 18.3% from a year earlier.

In the Midwest, about 194,000 permits were granted, up 1% from March and 1.6% annually. Only about 122,000 permits were issued in the Northeast, down 10.3% from March but up 13% from a year earlier.

Housing starts also dipped 2.6% in April from March, but were up slightly by 0.7% over April 2016, according to the report.

And the number of new homes completed, about 1.1 million, fell 8.6% month-over-month. However, in a bright spot for buyers, they were up 15.1% over the same month last year.

New homes help alleviate the housing shortage, but are typically aimed at trade-up or wealthier buyers. The median price of a new home was $315,100 in March, according to the most recent data available from the U.S. Census Bureau and U.S. Department of Housing and Urban Development. That was 33.3% higher than the median price of an existing home at $236,400 in March, according to the latest National Association of Realtors report.

“This continued, slow pace of construction of new homes is a major bottleneck to a faster economic and housing recovery,” NAR's chief economist Lawrence Yun said in a statement.

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