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A few months ago, homebuilders were on a knife’s edge.
Mortgage rates had spiked, steering buyers clear of higher-priced new builds. Labor markets were tight, making mass layoffs of scarce workers a non-starter. Material costs were still sky-high. Foot traffic and other measures of buyer interest were grim.
This all culminated in a 34 percent drop in new-home sale levels in the first seven months of 2022, after accounting for normal seasonal patterns.
But over the course of nearly a year, builders have gradually, arduously clawed their way out of this once-deep hole.
Today, homebuilders tell their trade groups that they’re feeling much better about the near future than they did a year ago. And investors appear practically giddy about the long-term financial prospects of the biggest publicly traded builders.
How did builders pull this off? And where might this sector be heading?
Buried deep within the government’s Survey of Construction are some key answers.
Intel combed through this government dataset — updated each month by the U.S. Census Bureau and the Department of Housing and Urban Development — as well as info from trade groups and financial markets, in an attempt to arrive at a more comprehensive idea of what’s going on in residential construction.
“As it relates to homebuilding, the economic environment has stabilized as customers have adjusted to and accepted higher-for-longer interest rates,” Stuart Miller, executive chairman for homebuilding giant Lennar, told investors last week. “The supply-chain chaos has normalized. Inventories have remained low. And the supply of housing across the country is in very limited supply.”
Miller’s comments were largely consistent with homebuilder data nationwide.
But the picture that emerged from this review also suggests this is a two-part recovery: A first stage in which builders leveraged incentives to offload a glut of completed homes to anyone who might buy them; and a second stage where sales have been fueled by more sustainable forms of demand.
And that second stage may be what’s generating the most excitement among builders and their investors.
A slow climb — and a bullish future
It was never going to last forever.
The early coronavirus-pandemic housing boom saw waves of movers and first-time buyers who all wanted to take advantage of record-low mortgage rates and in some cases upsize into a home that could better fit their needs while working more frequently from home.
That boom is readily apparent in the government’s data on home sales, which leapt in 2020 and remained at elevated levels throughout 2021.
Also apparent is the bust in new-home demand that occurred in early 2022.
Chart by Daniel Houston
The numbers above are seasonally adjusted, so a prolonged rise — or fall — can be interpreted as a meaningful change in new-home sales as opposed to a temporary seasonal shift.
And in more recent months, following the low point in July of 2022, we see that sales of newly built homes have recovered steadily. Back then, builders were selling homes at a pace that would sustain a mere 543,000 transactions per year. By this April, their annual sales pace had risen to 683,000 transactions — a 26 percent increase.
Builder confidence has followed suit.
As tracked by the National Association of Home Builders, confidence among homebuilders has once again entered net-positive territory. For the first time since July of last year, the trade group’s index rose to 55 out of 100 in June — meaning builder sentiment was generally more positive than negative.
That’s a big reversal from its low point in December, when builder confidence registered at 31 out of 100.
The new-home sales momentum of early 2023 was even more exciting to another group with a longer time horizon for success — investors.
Stock prices for five of the biggest homebuilders by market capitalization — Lennar, D.R. Horton, NVR, PulteGroup and Toll Brothers — are collectively booming this year.
Chart by Daniel Houston
As we can see above, homebuilder stocks have significantly outperformed the S&P 500, a high-performing stock index consisting of America’s largest publicly traded corporations. These big builders also recently exceeded their own share-price highs from before the beginning of the pandemic housing correction.
Investors have long been high on homebuilder stocks, in part because of the fact that U.S. homebuilders have failed to keep up with demand for new homes nationwide for years, leaving a large shortage of housing units even as the population continued to grow and new generations aged into their peak homebuying years.
“Additionally, we believe that the supply constraint will continue to limit available inventory and maintain supply-demand balance,” Miller told Lennar investors last week. “The core elements of the supply shortage will not resolve in the near term as the almost 15-year production deficit will take years to resolve.”
Low inventory, lower price points
As buyers adjusted to the higher-mortgage-rate environment, builders began to take advantage of one of their chief sources of competition — the resale market.
The nation’s inventory of existing homes for sale — already stretched thin by the frenzied market of recent years — saw signs of a brief recovery in late 2022. This inventory, however, has since been dashed by a hotter-than-expected spring.
As Intel examined last week, a dearth of new listings by homesellers has ensured that inventory remains tight across the country. Nearly every market continues to favor sellers. And this has led to surprisingly fierce competition for home listings, especially in the lower price tiers of the market.
That interest in lower-priced homes has carried over to new-home construction as well.
Chart by Daniel Houston
The chart above shows two things: A decline in the sub-$400,000 price point among newly built homes in recent decades, which coincided with an increase in new homes priced at $500,000 or more; and an early but sudden reversal of that trend in the first three months of 2023.
This indicates that a greater share of recent new-home sales has been at lower price points. And with the midtier price range of between $400,000 and $500,000 remaining roughly unchanged as a share of all new-home sales, it suggests a shift in focus toward more affordable price tiers as builders have navigated the down market.
But this leaves unanswered one crucial question: For whom are these homes being built?
From the ground up
When sales were still plummeting, builders largely felt the impact high up in the pipeline.
Sales of completed homes — largely consisting of spec homes and canceled contracts — barely budged at all as buyers backed out of the market for homes under construction and semi-custom homes that had yet to be built.
This loss of interest in uncompleted projects left builders with an urgent pair of tasks in late 2022: Finish the homes that were still under construction, and sell off the completed inventory as fast as possible.
In the back half of 2022, builders made gains doing exactly that.
Chart by Daniel Houston
The chart above makes clear the new-home sales recovery has consisted of two distinct phases since the low point in mid-2022:
- An offloading of completed homes — second half of 2022
- An increase in sales of to-be-built homes — opening months of 2023
In the first stage late last year, builders used a variety of methods to offload idle completed inventory. Incentives, including mortgage-rate buydowns, were often viewed as necessities among builders during that time. But since then, sales growth has been concentrated in a healthier long-term category: New projects that have yet to break ground.
But buried in the data is another clear trend — a greater share of residential construction projects were breaking ground with the express purpose of eventually selling to investors as rental properties.
Chart by Daniel Houston
In this way, we can see at least one way that builders were able to supplement their sales, particularly in the early stage of the recovery.
And while the chart above reflects 12-month averages, investors did decline as a share of new-home purchases in the opening months of 2023 — declining from 8.8 percent of transactions in the fourth quarter of 2022 to 7.4 percent in the next three months.
Only time will tell if that trend will hold. But if does, that recent decline in investor market share may signal that traditional families truly are re-entering the new-home market. And they’re wanting to build from the ground up.
