In real estate, you want your future home to be a great match, and if current houses on the market aren’t meeting your list of must-haves, constructing a home or purchasing new construction may be your best option.
But the second thing you must ask yourself is if you can afford to build a new house.
The housing market may be more favorable to homebuyers in 2023, but the cost of building a new house will not necessarily seem more cheap.
According to Real Estate Witch, a partner of real estate education platform Clever, the median price to construct a house from the ground up in 2023 is $446,000, not counting the cost of land.
However, a variety of reasons may make building a house or purchasing a new construction home more expensive – or more difficult to locate – in 2023.
Here are the housing and development experts’ predictions on how home construction will change in 2023.
Builders Don’t Expect Many Buyers
The biggest obstacle for homebuilding in 2023 is the more pessimistic outlook coming from builders themselves – and it’s been low for some time. “Homebuilder sentiment has been down in every month of 2022,” says Orphe Divounguy, senior economist for Zillow.
The preliminary number for December 2022 in the National Association of Home Builders and Wells Fargo National Housing Market Index revealed homebuilder confidence was at just 31 out of 100 – the lowest it’s been since April 2020. The NAHB/Wells Fargo index was at 84 in December 2021, and has declined monthly since.
Making up the index are ratings regarding three major components, rated by a panel of builders: present single-family sales, single-family sales in the next six months and traffic of prospective buyers. For December 2022, single-family sales both current and in the near future scored in the mid-30s, while traffic of prospective buyers was rated just 20.
Buyers Are Still Contending With High Interest Rates
Concern for prospective buyers is in large part due to the tough year for housing affordability. Mortgage interest rates rose rapidly throughout 2022, reaching more than 7% in October, according to Freddie Mac. The rise in interest rates, combined with already sky-high home prices, has led to many buyers opting to hold off on shopping for a home.
“The buyer’s purchasing power has decreased 25% to 30%, … and that rapid decrease (in affordability), or increase in interest rates, has caused … a disruption in the housing market,” says Noah Breakstone, CEO of BTI Partners, a Florida real estate and land developer.
As a result, “we are now starting to see housing starts slow down,” says Owen Minott, senior policy analyst for housing and infrastructure for the Bipartisan Policy Center, a think tank based in Washington, D.C.
However, Minott says builder reactions mean the housing shortage isn’t getting answered fast enough. “The problem that we have in this country is that developers respond to the current market conditions – they only want to build a home if people are going to pay a high price for the home,” Minott says.
Housing Shortage Keeps Prices Higher
Builders’ fear of constructing homes without buyers to pay for them has some historical context: In the housing market crash of 2008 and 2009, the bottom fell out of new home construction in particular. Entire master-planned communities sat vacant and unfinished for years, and many people – from developers to construction site laborers – left the industry entirely.
“There was a huge slowdown in construction, and that lasted a long time,” Minott says. “The 2010s became the worst decade in terms of housing supply.”
While recent years have offered some renewed momentum for homebuilding to meet high housing demand, the continued decline in builder confidence and subsequent builder slowdown means catching up on the millions of housing units the U.S. needs is further in the distance.
The seasonally adjusted annual rate of building permits for privately owned housing units authorized in November 2022 was 22.4% below November 2021, according to the U.S. Census Bureau.
Materials Prices Impact Bottom Line, and Vary in Cost
Lumber is significantly cheaper than it was in 2021 – less than one-third the price in December 2022 compared to December 2021, according to Trading economics. However, the Bureau of Labor Statistics reports that other construction materials, from concrete to ceramic tile and asphalt roofing, have all risen moderately since 2021.
Materials for your home’s construction will vary depending on where your home will be located, but their cost will affect your bottom line. Expect seasonal fluctuations to play a role, and any interruption in the supply chain can increase the cost of your new home or delay its completion.
2022 New Home Buyers Still Getting What They Bought
If your 2023 new construction home was planned in 2022, you should still be getting what you bought. “Builders have a backlog of homes being built,” Breakstone explains.
Properties planned, permitted and sold months prior are still being delivered as completed houses, and the rate at the end of 2022 shows growth compared to the same time in 2021, when materials availability and supply chain issues were more exacerbated. That’s evident in the housing completions reported by the U.S. Census Bureau for November 2022: 1.49 million privately owned housing completions were reported, 6% above November 2021.
Plus, the decline in new housing permits doesn’t necessarily mean developers and builders are going to stall out for all of 2023.
Breakstone explains that it’s unclear how the market is going to react to various economic stressors. There’s enough uncertainty surrounding employment, interest rates, material supply chain and more that the first two quarters of 2023 is likely to be a “period of discovery,” where builders and developers wait to see what will happen next, he says.
A Shift for Homebuilding in 2023?
The question becomes whether new construction will pick back up after a wait-and-see period. Divounguy says he doesn’t anticipate a development stall like that of the Great Recession. “I don’t think that’s going to happen this time around, although builders are not that confident,” he says.
One optimistic sign is the moderate drop in mortgage interest rates at the close of 2022. As of Dec. 22, the average interest rate for the 30-year, fixed-rate mortgage was 6.27%, the lowest it’s been since Sept. 22, according to Freddie Mac.
“Mortgage rates fell and mortgage applications increased,” Divounguy says. “Builders will be able to move some of the inventory.”
Builders may also shift gears to better answer the affordability issue – designing houses with less square footage, on slightly smaller lots to make it appeal to more first-time homebuyers than is typical among those purchasing new construction.
For now, however, most developers and builders are scaling back their work to see what happens next. If you’re looking to build a home yourself, you may be able to take advantage of available contractors – or you may find that they’ve already shifted to other work.
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