New Home Construction Stalls

When the market for housing gets hot, homebuilders typically get busy, motivated by visions of outsized profits. For those looking to buy, the prospect of more supply coming into the market provided hope that prices could stabilize or even fall. A recent report from the US Census Bureau suggests this may not happen anytime soon. The agency found June’s single-family housing starts, which measure new home construction, fell 8.1% from May. Construction of single-family units was down 15.7% year-over-year.

This situation has industry experts asking where housing prices will go from here, given inventory is already at a historically low level.

Headaches for Homebuilders

The Fed’s attempts to combat inflation are making a major impact on housing market conditions. A series of rate hikes, implemented by the central bank since March of this year, have triggered higher costs for mortgage loans. As the potential burden of higher debt prices more would-be buyers out of the market, the expectation is house prices will fall on lower demand.

However, the other side of the equation is supply. Homebuilders are facing numerous headwinds that have soured the deal from their perspective. Inflation has pushed up the cost of everything from land and materials, to financing. That has effectively dried up the prospect of juicy profits that would otherwise be offered by high home prices.

Outlook for Rentals

Current market dynamics seem to be leaving would-be homebuyers with limited options. Some are simply priced out of the market and they’re unlikely to find bargains in the rental space either. Market observers note rents have increased about 14% on average over a 12-month period.

On a positive note, there is reason to be optimistic that rents could eventually moderate. Recent housing numbers indicate builders are continuing to add to the supply of multi-family units, and this could tip the supply-demand balance in tenants’ favor.

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