Is 2023 a bad time to build a house?
5 Reasons why it is good to build during a recessionby Andrew October 30, 2023
5 Reasons why 2023 is a good time to build your forever home.
- Construction Costs are moderating
- Supply chain has improved
- Refinance Options at lower rates will become available
- Increased Land Availability
- Resale Values will hold up
As stability returns (Less Price Increases & More Product Availability) to the housing market in 2023 it will greatly improve the homebuilding experience without the rapid price increases and supply chain issues that have been normal over the past two years.
It’s no secret that most people say it is a bad time to build a house. According the Housing Sentiment Index only 19% of consumers think it is good time to buy a home. Interest rates are at multi decade highs and a recession may be on the horizon. Update: As of October 2023 the housing sentiment has continued to decrease pushed down further to only 16% of consumers think its a good time to buy because of the increase in interest rates.
5 Reasons why 2023 is a good time to build your forever home.
1.) Construction Cost Increases are Moderating.
Good News! Construction cost increases have begun to slow to 3.3% increase year over year as of September 2022 according to the National Association of Homebuilders (NAHB). Since the start of the pandemic costs have increased around 32%. The historical average pre-pandemic has been an increase of under 2% yearly building cost increase. The silver lining to the Fed interest rate increases is that they have dramatically slowed the pace of cost increases we were experiencing that at one point were increasing at close to a 20% increase year over year. We anticipate overall construction costs to increase at a normal pace between 2% – 4% in 2023. Update: This has remained true in 2023 and costs increases have maintained their normal increase of between 2% – 4%. We foresee this to remain the case in 2024, with the increase of labor costs being the main driver of the typical price increases.
2.) Supply Chain is improving. Waiting a year for appliances and garage doors has become expected over the last 2 years. In addition there were many suppliers that reduced availability of products and customizations in order to ease supply chain constraints. The good news is we finally see this improving. 64% of the building materials dealers say the supply chain improving with 0% saying it is getting worse. Update: In almost all cases the supply chain availability is completely back to normal. Electrical transformers are the main area where we see lengthened lead times.
3.) Interest Rates will most likely decline in the future. Interest rates tend to run in cycles. With mortgage rates increasing at the fastest pace since 1981 there is due to be a pullback in rates at some point. The mortgage market is already pricing in the fact that rates will fall within the next several years. One fact to understand about mortgages is that the majority of people refinance or sell their home before the maturity of the loan. The spread between the fed funds rate and mortgage rate you are being charged is how the lenders get paid. The current spread on mortgages is significantly higher than normal because it is suggesting that the banks know most new originated loans are going to be refinanced as soon as rates begin to fall. Update: Interest Rates have remained elevated and continued to increase in 2023. We expect Interest rates to begin to fall towards the end of 2024.
4.) Less competition to find land. Finding buildable lots has been one of the biggest challenges for our clients that wanted to build over the past several years. Good lots were being bought so fast you almost had to know the seller prior to them listing the land. This caused land pricing to escalate in some cases even more rapidly than house prices. The buying frenzy has cooled which has brought some stability to the land market. While we don’t foresee a large new supply of lots coming for on-your-lot custom builds, we do see the days on the market increasing for land which will help increase the available supply of lots. Update: Finding available land to build on continues to be the biggest challenge for clients looking to custom build their forever home. Higher Interest rates have only slightly moderated demand for land and future decreases in interest rates may only increase demand further which could continue to escalate land pricing. Land to custom build on will continue to be constrained in supply for many years to come because of the regulations to develop new lots.
5.) Resale Values will remain steady. Although the 2008 housing crash is still fresh in our minds, the current housing market is much different than in 2008. 85% of Homeowners have a mortgage rate locked in under 5%. This is the opposite situation of 2008 where homeowners had variable rates that adjusted to a rate that they could not afford. In addition there was a record number of homes being built. These two issues created the perfect storm of over supply and distressed sales which put downward pressure on house prices. In 2022 we have been under building homes for many years with an estimated under supply of 2 to 4 million houses. Since most people do not need to move the supply of available homes is not increasing much even with demand decreasing. This low level of housing supply will continue to support housing values without significant decreases in value, especially in the Midwest markets like Ohio. Update: Despite the low demand for housing the limitied supply of houses available has continued to push house prices higher in 2023. We anticipate house prices to continue to increase in 2024 with supply remaining constrained. Increases in demand caused by future lower interest rates could accelerate price appreciation.
Want more insight into the housing market?
Watch the video below from one of our favorite podcasts, Odd Lots, to learn more about interest rates & the supply/demand dynamic of the current housing market.
Should I Build my Forever Home in 2023?
We understand it is a fear that you are buying a home at the top of the market however, most of our clients are not purchasing a home purely as an investment and they are building a new home that is going to be their Forever Home. With this in mind we suggest not looking at building home as an investment decision and look at it as a lifestyle decision. If you plan on living in your home for longer than 5 years chances are you will not only benefit from price appreciation but also have the enjoyment of your family living in your new home during that time.