start of this year, few analysts predicted that demand for US new homes would
rise. On the contrary, many believed that the chronic shortage of building
materials and the sharp uptick in their prices would lead to a slowdown in the
market. However, the opposite has occurred and as a result, Knight Frank says that
“US new homes are 2023’s surprise winner”.
U-turn in US new homes advice
The Knight Frank Intelligence Lab reports that 2023 began with stock market analysts advising investors to sell their shares in US homebuilders. These analysts based their guidance on issues in the supply chain for building materials and rising prices within it.
However, the homebuilding sector has enjoyed a strong start to the year as buyer demand for US new homes soars. As a result, those same analysts are now “eating their words”, according to the Financial Times.
Reason for about-turn
The reversal in the fortunes of new homes in the US lies in the impact of higher mortgage rates on the property market. More expensive mortgage payments have direct consequences on both homeowners and would-be buyers.
Effect on current homeowners
Many have chosen to remain in their current properties because they’re tied to low mortgage rates, locked in before interest rates rose. This situation, known as “golden handcuffs”, affects a significant proportion of mortgages in the US.
As a result of these households staying put, fewer resale properties are available on the market, putting further pressure on already low inventory levels.
Effect on would-be buyers
Lack of supply in many parts of the country is an obstacle buyers have faced in the US since before the pandemic. For example, few metro areas have resale inventory levels at six months or above, considered a balanced market. On the contrary, many have just one or two months’ supply.
Buyers, particularly first-time buyers, must, therefore, look outside the resale market and consider buying a new build. As a result, demand for US new homes has surged this year as the chart below shows.
Surprise winner in 2023
The current new-home situation is quite the opposite of what analysts expected at the beginning of the year. Consequently, Knight Frank refers to US new homes are this year’s surprise winner.
With mortgage rates showing no signs of going down significantly over the next year, it would be reasonable to expect new-home demand to continue at similar levels for the rest of 2023. US homebuilders, therefore, find themselves in the winning position.
(Source: Knight Frank)