Buyers May be Backing Off from THIS Real Estate Sector

As new home sales plunged in October to their lowest point in 2½ years, analysts like Ralph McLaughlin, deputy chief economist at CoreLogic, say that these falling sales volumes are not indicative of “a market on the brink of collapse,” but rather of a market “coming into balance.”  He noted although interest rates have “really tamped down demand” as they continue to rise, the new-home market is not necessarily foundering, but rather shifting. For example, builders, finding themselves unable to drop their prices in today’s housing environment, are shifting to other new-construction options, like townhouses, to create lower-cost housing[1].

“With construction costs still going up, there are really tough margins everywhere,” said Bruce McNeilage, an affordable housing developer active throughout the southeast. McNeilage, who focuses almost exclusively on build-to-rent single-family developments in the southeast and a branded series of condo developments in the Nashville area, added, “I will tell you that interest rates going up for an entry level buyer is going to significantly hurt that buyer because they very well may find their applications declined because the numbers of their debt-to-income ratio are now skewed.” McNeilage operates his build-to-rent communities on the basis that any tenant can purchase their home at any time, regardless of the maturity of their lease, but warned, “These rising rates are going to make buying unaffordable for them.”

The builder added, however, that this creates a “windfall” for developers willing to build-to-rent “because people that wanted to buy these entry-level houses now have to rent them. The higher the interest rates, the higher the construction costs, the most expensive the houses become, and it all creates a boom for the rental business.”

The National Association of Home Builders (NAHB) said that this past fall’s movement toward lower new-home sales is “consistent with reports from our builders, who say that the job market and demographic tailwinds bode well for housing demand” but that customers are still choosing to “take a pause.” Randy Noel, NAHB chairman, recommended policymakers on local, state, and federal levels “see this drop in sales as an indicator that housing affordability will continue to slow down the market.”[2]

Are you concerned about falling new-home sales volumes, or do you see opportunity to build your real estate portfolio instead?