Housing starts reach one-year high in October

Deborah Kearns
Deborah Kearns
The Mortgage Reports Contributor
November 20, 2017 - 4 min read

New construction is on fire to meet buyers’ unrelenting demand.

Housing starts rose in October to a seasonally adjusted annual rate of 1.29 million units, according to a joint release from the U.S. Census Bureau and the U.S. Department of Housing and Urban Development.

That’s the highest level since October 2016. It’s also 13.7 percent higher than September’s upwardly revised rate of 1.135 million units, exceeding expectations.

Economists polled by Reuters had predicted housing starts to come in at 1.185 million units for the month.

As buyers flock to new construction, spurring positive gains across the board.

Overall building permits rose 5.9 percent month-over-month to a seasonally adjusted annual rate of 1.297 million, according to the joint release. Housing completions also rose in October.

Post-hurricane rebounds in Florida and Texas are responsible for boosting October’s numbers, says Robert Dietz, chief economist for the National Association of Home Builders.

Total housing starts in the South spiked 17.2 percent in October to 621,000 units. Driving the increase: new single-family starts surged 16.6 percent to its highest level since 2007.

The start of 2017 was a rocky one for new construction. However, these numbers signal a positive shift heading into 2018.

Strong housing starts boost builders’ confidence

As new construction fires on all cylinders, builder confidence is surging. And that bodes well for the market in the year ahead.

In fact, builder confidence rose to a reading of 70 in November — the highest level since March — on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI).

What’s driving this renewed optimism?

For starters, the resale market is struggling with limited inventory and rising prices. Buyers are turning to new construction as a solution.

“Demand for single-family housing is increasing at a consistent pace, driven by job and economic growth, rising homeownership rates and limited housing inventory,” Dietz says.

“With these economic fundamentals in place, we should see continued upward movement of the single-family housing market as we close out 2017.”

Builders still struggle with a shortage of skilled workers and hikes in material prices. Those uncertainties could temper builders’ expectations as we head into 2018, but continued economic growth will help reassure them.

New-home sales growth outpaces resales

In September, sales of new single-family homes jumped 18.9 percent above August’s rate. That brisk pace also was 17 percent higher year-over-year.

In sharp contrast, existing-home sales rose by just 0.7 percent in September from August after three straight months of declines, according to the National Association of Realtors.

The dismal activity isn’t due to a lack of buyer demand either, says Lawrence Yun, NAR chief economist.

“Home sales in recent months remain at their lowest level of the year and are unable to break through, despite considerable buyer interest in most parts of the country,” Yun says.

“Realtors this fall continue to say the primary impediments stifling sales growth are the same as they have been all year: not enough listings — especially at the lower end of the market — and fast-rising prices that are straining the budgets of prospective buyers.”

As the holidays approach, buyer demand tends to slow and sellers are more aggressive with price reductions. Still, the lack of inventory might keep home prices out of reach for some time to come.

Buying new? Some tips before you shop

Before you take the plunge and buy new, here are a few things to know:

1. You'll pay a premium. New homes tend to cost more than resales. Why? Land is expensive. Also, labor costs and building materials have skyrocketed in recent years. Keep in mind, too, that design upgrades will run up your final bill, as well as the lot location and size/floor plan of a new home. If you don’t have wiggle room in your budget, skip the bells and whistles and choose a standard lot.

2. Don't expect a drop in list price. Builders tend to stick to their guns on list price because they have to meet revenue goals. You won’t likely see huge reductions in the sales price, but try asking for other incentives, like help with closing costs or upgrades in the design center.

3. Ask for incentives at certain times. Builders might sweeten a new-home sale in December, when buyer demand typically tapers off. Also, builders tend to be more generous near the end of a business quarter when they’re scrambling to meet sales targets.

4. Shop lenders. You don’t have to use the builder’s financing. It’s important, as with all mortgages, to shop around for the best rates and terms. If you’re using a custom-home builder, it’s worth considering a short-term construction loan.

5. Get everything in writing. This is critical, because upgrades and other amenities add up fast. Also, take time to read over the home warranty, which offers coverage for a limited time period for major structural issues and building materials. Understand what is (and isn’t) included in your home warranty before signing a sales contract.

6. Hire a home inspector. Protect your investment (and interests) by hiring your own home inspector to monitor each stage of construction. They could spot items that will cost you a lot of money to fix down the road, and help get ahead of major issues you won’t be able to see until it’s too late.

What are today’s mortgage rates?

Take your time to weigh the pros and cons of buying a new home versus a resale. Getting your financing in order is the first step.

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