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ShareThe debate over whether real estate should be considered an essential business rages on in many states, but construction has slipped under the radar.
That’s not to say that the home building industry has not been affected by the pandemic. According to a survey conducted by the Association of General Contractors of America, the COVID-19 pandemic has led to layoffs in more than 16% of respondent firms.
While its undeniable that the new home construction market has suffered a hit, what’s the extent of the damage? Will it ever recover? If so, when?
How the Pandemic Has Impacted Demand For New Homes
The unemployment rate is the primary factor that drives home buying demand, and with the nation losing a staggering 20.6 million jobs between March and May 2020, the demand for new construction homes was bound to take a hit.
However, there are also other factors that influence home buying demand—especially new construction demand. We’re, of course, talking about factors such as the wealth of households—which is directly connected to the stock market as well. Thankfully, we have some reprieve here, as the stock markets are starting to show signs of recovery.
Disruptions in the Supply Chain
Many homebuilding materials—such as kitchen cabinets, plumbing fixtures, and lighting fixtures—are imported from overseas, and with ongoing travel and trade restrictions, many builders are struggling to move units through the construction pipeline. Many builders have asked for projects to be delayed, while some have even canceled projects outright
Moreover, while homebuilding has been classified as an essential service in 45 out of 50 states, new SOPs have resulted in a lack of efficiency, due to stringent social distancing guidelines.
What to Expect in the Near Future?
While the last few months have been difficult for homebuilders, they’ve made it through the eye of the storm. Experts are predicting that the demand for new construction homes is set to increase drastically from the first quarter of next year. Why? Well, considering the pandemic, consumer preference for high-tech, brand-new homes in the suburbs with all the necessary schooling and working amenities will grow significantly.
Moreover, considering the historically low interest rates that are available right, new construction homes are becoming an increasingly attractive option. The current situation has also created a pent-up demand for moving into larger, more open homes, where working from home isn’t going to be difficult. With the majority of corporations allowing their employees to work from home, the need to be located close to their place of work is no longer a priority. Furthermore, home offices have become an increasingly sought-after addition for homebuyers.
Consequently, many people are ditching high-cost living metros in favor of new construction homes in suburbs, where they can find more affordable housing which suits their needs. Finally, there is vastly shrinking resale inventory, which means many will be turning to new construction inventory to fill that void.
The downside of the increased pent-up demand and limited inventory is that new construction prices are increasing due to supply/demand, plus the cost of lumber is skyrocketing. Couple that with reduced labor availability, increased social distancing that reduces the efficiency of production building, and speed at which a home can be built, it’s only natural that it will be more and more expensive to buy a new construction home. Even with lower interest rates, the monthly cost could end up being more than it was 6 months ago for the same type home in the same location.
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