Builders see costs stabilize after years of pandemic-driven price fluctuations
The volatile rise and fall of home reconstruction costs following the COVID-19 pandemic is finally stabilizing in 2024, providing much-needed relief to builders and homeowners, according to a CoreLogic report.
Between 2020 and 2021, construction costs surged due to skyrocketing material prices, but recent data shows a much calmer market.
During the height of the pandemic, reconstruction costs shot up by an average of 16.6%, with New York seeing the steepest rise at 22.7%, and San Francisco experiencing a more moderate increase of 10.6%. While these cities faced different levels of cost increases, both still rank among the most expensive places for homebuilding.
Costs eventually cooled down, with prices dropping by 1.9% between 2022 and 2023, CoreLogic reported. Since then, reconstruction costs have risen again, but this time, they’ve reached a more stable point - hovering just above pre-pandemic levels. Builders are finally seeing a bit of predictability in pricing after years of constant shifts.
Data from the National Association of Home Builders (NAHB) showed builders are finding less need to offer discounts and incentives. In September, the share of builders cutting prices dropped to 32%, down slightly from 33% in August.
Price reductions averaged 5%, marking the first time this number has fallen below 6% since July 2022. The use of sales incentives also dipped, from 64% in August to 61% in September.
Builder sentiment is also on the rise. Confidence in the new single-family home market bumped up to 41 in September, a slight improvement from August’s reading of 39. This marks the end of a four-month streak of declining confidence.
Lower mortgage rates have contributed to the optimism. Rates dropped by more than half a percentage point from early August through mid-September, helping to boost builder confidence.
“Thanks to lower interest rates, builders now have a positive view for future new home sales for the first time since May 2024,” said NAHB chairman Carl Harris.
However, Harris noted that construction costs remained elevated relative to household budgets.
“Moreover, builders will face competition from rising existing home inventory in many markets as the mortgage rate lock-in effect softens with lower mortgage rates,” he added.
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NAHB chief economist Robert Dietz expects that upcoming Federal Reserve actions could provide further relief by lowering interest rates for home construction loans.
“With inflation moderating, the Federal Reserve is expected to begin a cycle of monetary policy easing this week, which will produce downward pressure on mortgage interest rates and also lower the interest rates on land development and home construction business loans,” Dietz said in the report. “Lowering the cost of construction is critical to confront persistent challenges for housing affordability.”
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