For most people, buying a home means moving into a place that was previously owned and occupied. That’s because existing homes make up about 90% of total home sales in the U.S., representing the vast majority of the nation’s housing supply.[1] But that story may be changing. As we continue to face a nationwide supply shortage, and people long for larger homes with more space to spread out, new-home construction is attempting to close the gap. Can it keep up with the overwhelming demand?
The Situation
Housing inventory hit its lowest recorded level in 2020 [2]
Since the pandemic, 21% of buyers want more outdoor space, and 10% want a bigger home [3]
Millennials are driving immense homebuying demand: 4 million+ millennials will reach prime homebuying age (29-30) in 2021, 2022, and 2023 [4]
The housing shortage has been evident for the past several years, but challenges have persisted in preventing the new-home market from solving the problem:
Affordability. Home prices have been steadily rising for the past decade. In Q3 2020, only 58% of homes were affordable for the median-income earner, and as of December 2020, the median new-home price was $355,900, compared to $309,800 for existing homes.[5] What’s more, material costs are rising at an exorbitant pace. As of Q4 2020, lumber prices were up 170% since April, adding about $16,000 to the price tag of a new single-family home.[6]
Labor shortage. The industry has dealt with a lack of skilled laborers since the Great Recession, and that issue continues to this day.[7] McKinsey & Company predicts that 41% of the current U.S. construction workforce will retire by 2031, leaving roughly 300,000 construction jobs unfilled.[8]
Zoning restrictions. Many residential areas are zoned for detached, single-family homes,[9] and while more people are seeking this type of housing following the coronavirus outbreak, a newly built house is about 450 square feet larger than the typical existing home[10,11] — making it more expensive. Such zoning restrictions limit the construction of smaller, more affordable homes, such as duplexes, townhomes, and condos.
The Good News
It’s evident that more work remains to be done to make new construction a viable alternative for would-be homeowners, especially first-time buyers who need affordable options. Yet progress is already underway.
In 2020, despite temporary setbacks in the early part of the year, we saw a strong uptick in residential construction activity.
In Q3 2020, new-home sales soared to pre-Great Recession levels.
New Single-Family Home Sales[12]
Housing Starts fell sharply from pre-COVID levels, then quickly rebounded.
Privately Owned Housing Units Started[13]
Building permits and completions also faltered briefly but continued their upward trajectory.
New Residential Construction[14]
Builder confidence soared, breaking records several times.
NAHB/Wells Fargo Housing Market Index (HMI)[15]
Values above 50 = good; Values below 50 = poor
“The housing market continues to be a bright spot for the economy.”
— NAHB Chief Economist Robert Dietz
In addition to these positive indicators, historically low interest rates continue to offset affordability challenges, making it possible for more people to buy a new home. Meanwhile, industry advocacy groups are hard at work to solve the issues facing the residential construction market.
Building new homes is the key to replenishing the nation’s housing supply, improving affordability, and meeting the demands of today’s homebuyers. While we still have a ways to go to make this a reality, positive progress is being made.