Mixed Messages Decoded: New Construction in the New Recovery

With the gradual, yet undeniable growth in jobs and decline in housing inventories, the market is creeping its way back up from the lows of a few years ago. Shadow inventory – foreclosed homes that are anticipated to reenter the market – is down as much as 15% in a number states and many of those bank-owned homes are now investor-owned homes that are cash flowing as rentals. In other words, things are getting straightened out (article). Housing reports state that the next three to seven years will continue to see this slow but steady uptick.

What these circumstances create is an interesting twist in the numbers; yes, “single-family resales fell 8.4 percent to a seasonally adjusted 350,000-unit annual rate, the lowest pace in five months, the Commerce Department said on Wednesday” (article). However, a deceleration of sales is inevitable if housing inventory is shrinking. Less homes to buy equals less people buying homes.

Now that we’ve recapped the resale market, what does that mean for new construction? New home construction increased 4.7% in June, the fastest in two years and the highest since October 2008. The Commerce Department said Wednesday that housing starts rose 6.9 percent in June from May to a seasonally adjusted annual rate of 760,000 (article). Furthermore, confidence among home builders this month touched its best level in more than five years, according to the National Association of Homebuilders.

What accounts for this divergent trend in new homes? While sellers may be gaining confidence, most  owners’ listing price of their home is tied to the money they owe on it and many of these mortgages were taken out on overpriced homes many years ago. Without incurring huge losses, these mortgagees simply have no choice but to maintain inflated prices on their homes as much as is possible.

Builders are under no such constraints. Quite the opposite, in fact. The downturn has offered up great construction deals and more than enough skilled labor. Simply stated – a buyer can afford a new construction home for the same price as many resales and it’s just common sense that new is better than used. Warranties, lack of deferred maintenance and confidence in the quality of the home because the buyer knows exactly who built it only adds to the value of a new home.

In short, when buyers can, they’re buying new. And that’s all good news for the economy since the reality is that new construction has a far greater impact than resales. Each home built creates an average of three jobs for a year and generates about $90,000 in taxes, according to data from the home builders association. Here at Encore Custom Homes, we are excited to be offering members of our community the opportunity to buy new, experience great value and exceptional quality and ultimately contribute to a more robust economic recovery.

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