New Home Builder Confidence Drops: What this Could Mean for the Real Estate Market

Dated: February 2 2021

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Note: Builder confidence in the market for new built single-family homes dropped 3 points to 83 in January, per NAHB/Wells Fargo Housing Market Index (HMI). 

Since almost the very beginning of the COVID pandemic, the housing market blanketing almost the entire country has seen a robust increase in buyer demand. The catalyst for most of this demand has been largely due to record-low mortgage interest rates in cooperation with the dismally low amount of inventory available to buyers on the active markets. Depending on which side of the real estate market fence one stands, as a buyer or potential seller, this combination of low supply and high demand has been either a blessing, and for many a life-changing blessing, or an absolute wet blanket on one's future planning efforts. If you paid attention for even five minutes in high-school economics classes, you might already be coming to an accurate conclusion on what low supply and high demand means, and that is increased prices. 

Increased home prices are being seen across the country and specifically, in the DC area, home prices are up an average of 9% since this time last year, according to the Northern Virginia Association of REALTORs. In the DC area, the average sale price for single family homes is around $670,000, which means an average year over year increase of over $60,000 in home value in just 12 months. For thousands of home owners in the DC area with home values above $670,000, this means well over $100,000 in market value increase during the same time period. Aggregating that amount with the near 70% increase realized over the past 10 years, the getting is good for quite a few folks willing to sell their homes. For many home sellers, that's life changing money when they sell their home to downsize or relocate to a more affordable area. However, the flip side to this coin is the negative impact on those would-be homeowners seeking to buy a home, and for many, their very first home. The supply shortage has caused almost every decent home that hits the market to become a frenzy with most selling above their listed price, and many for tens of thousands of dollars over that listed price. When only one buyer can buy one house for which dozens are competing, the competition is fierce. 

One way to avoid the competition has been for buyers with time on their side to work through their real estate agents and new home builders to design and build a brand new home. It's much easier to buy a home that does not yet exist, as it is really hard for dozens of buyers to be beating on the same door that isn't even there. However, the new data from the National Association of Home Builders, known as NAHB, suggests new home builders are becoming a tad more nervous than they have been, questioning whether their enthusiasm during 2020's housing market could possibly be misplaced in current times. In January 2020, NAHB reported a decrease in the NAHB/Wells Fargo Housing Market Index (HMI), which aggregates multiple factors in the context of new construction, providing an average mark, which is currently down three points to 83. As you can see in the chart below, this decrease is only a small fraction of the decrease we saw from early to mid-2020, however, followed by a lengthy and steep increase. In fact, the current HMI index is still higher than it has ever been in the past 10 years. So arguably, the data is just highlighting a lower level of exuberance rather a dismal forecast. 


Source: NAHB; https://i0.wp.com/nahbnow.com/wp-content/uploads/2021/01/HMI-Jan2021.jpg

The sentiment surrounding the data should not be ignored though either. The pandemic has impacted the entire world and new construction is no exception. The price for materials required to build a home has skyrocketed as of late due to supply chain issues and lower output from suppliers, such as lumber mills. Another concern for new construction, which this author found surprising although fitting, is builders are having a difficult time finding available and suitable lots on which to build their homes. Tack on an ostensible concern over a changing regulatory environment and the fact COVID cases seem to be worsening rather than improving, and one can probably empathize with the concerns shared by new construction builders. However, once again, these are just concerns, they are not yet facts. Even the NAHB's data is based on surveys, not concrete financial or market data points. 

Although some might read the HMI chart and see the potential trend for a downturn in new construction, the reality on the ground, at least at the moment, remains unchanged. Homes are selling incredibly fast and at inflated prices. Home sellers are capitalizing on serious gains by selling their homes and cashing out hundreds of thousands of dollars, usually tax free gains too thanks to the IRS and its rules for selling a primary home. Per the IRS and Uncle Sam as a whole, we are incentivized in the tax code to be home owners, and one benefit is we can avoid paying capital gains taxes on up to $250,000 for single owners and $500,000 for married couples. This benefit is a whole separate blog article I have yet to write, but you can learn more about it at the IRS site. All that said, at least in the DC area, buyers are scrambling and presenting offers tens of thousands of dollars above the listed asking price and waiving contingencies left and right in order to beat out their competition. 

So, in the end, a bit of "what if" questioning among new home builders is likely not going to sway our real estate market in one direction or the other. I am not alone on this side of the opinion pool either, so you do not need to take me at my word. Chief U.S. Economist for High Frequency Economics, Rubeela Farooqi feels, "Builder sentiment is likely to remain strong for now, reflecting positive housing demand." Similarly, Ian Shepherdson, Chief Economist at Pantheon Macroeconomics, wrote "Developers have become adept and experienced at selling homes virtually" and he added his forecast for renewed exuberance in the new construction industry in the spring season after a quieter winter. 

I am a firm believer in leveraging all my senses, one of which is sight. Although we all know that which goes up must go down, in the context of gravity, it doesn't necessarily mean the same thing in cyclical markets, like real estate. Yes, markets go up and down, but markets are also not rational, regardless of what we have been told. So, what I and many in the real estate industry are seeing is that status quo. At least for the foreseeable future and barring black swan events, which totally happen, like a pandemic, the market will still be strong for sellers and buyers will be competing like gladiators. 

If you have thought about selling your home, I know how to reach thousands of buyers who would be ecstatic if you followed through on that urge, regardless of how timid a new construction firm might feel about it. If you want a report on your home's current potential value, request one here for free: Free Home Valuation Report
Keep in mind, the report will be automatically generated, so if you are serious, after you get your report, lets talk and then I'll do a manual assessment for you as well. 

HMI tables can be found at nahb.org/hmi. You can also get more information on housing statistics at Housing Economics PLUS 

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Andy Piedra

I believe those who serve the people of our country deserve to own their own piece of our country. . . My team and I make that happen, daily. I am a Military Veteran and the founder of the Veterans Re....

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