Confident Builders Constructing More, Smaller Homes

By Ryan Dosen

 

Homebuilders are feeling confident and they’re ready to ride the wave of first-time homebuyers that is starting to be unleashed onto the real estate market. Frozen out of the home buying game in the wake of the Great Recession, many would-be first-time home buyers had been forced to delay their plans while their jobs, credit, and finances were put back in order. As these overdue first-timers enter the market, builders are responding with more homes and smaller homes.

 

Confident Builders

The National Association of Home Builders (NAHB) reports that home builder confidence has reached its highest level in almost 10 years. The NAHB/Wells Fargo Housing Market Index measures builder perceptions about single-family home sales, sales expectations for the next 6 months, and buyer traffic. The index now sits at 61. Any reading above 50 means that more builders view conditions as “good” rather than “poor.”

NAHB chief economist David Crowe said that this recent report is consistent with NAHB’s forecast “for a gradual strengthening of the single-family housing sector in 2015” and that “job and economic gains should keep the market moving forward at a modest pace throughout the rest of the year.” NAHB Chairman Tom Woods concurred with Crowe’s sentiments, while also taking note that builders are still facing difficulties accessing land and labor.

 

New Home Starts Hit 8-Year High

The Commerce Department reported earlier this week that these confident homebuilders broke ground on new homes at the fastest pace since 2007. The significant 12.8 percent month-over-month jump in housing starts in July put housing production at a seasonally adjusted annual rate of 782,000 units.

National Association of Realtors (NAR) Chief Economist Lawrence Yun reacted by saying that “a fresh supply of new homes will therefore reach the market in upcoming months to help relieve the inventory tightness.” He also said that “there is no need to worry about an oversupply. Even more production would be welcomed.”

Yun is correct that more home production would be welcomed. The period of 2000-2003 is generally considered to be a “healthy benchmark” for housing starts. That time period saw an average annual production of 1.34 million housing units. So, while a recovery is clearly under way, we are still a ways off from normalcy.

 

More, But Smaller Homes

In the second quarter of 2015, the median size of a new home was 2,479 square feet. This number is about 40 square feet smaller than the previous quarter’s record high. The average size of new homes has been trending up for a while. In 2000, the average size of a new home was around 2000 square feet. Average home size spiked during boom of the early 2000s, fell during the recession, and has rebounded further to around 2500 square feet.

Unsurprisingly, when times are good, people have tended to buy bigger homes. Times are certainly better now than they were 5 years ago, with new home production way up and the average size of new homes rising from around 2100 square feet to around 2500 square feet.

Crowe foresees a gradual leveling off or decline of the median size of newly-built homes as more first-time buyers enter the market. However, he says that as first-time home buyers struggle with slowly loosening mortgage qualification standards and slow wage and job growth, it will take a while for the shift to be reflected meaningfully in the median home size numbers.

It’s a slow recovery, but it’s a recovery nonetheless. And with builders putting more shovels in the ground every day, the smart money is telling us that it’s a recovery that isn’t stopping any time soon.

 

– Ryan Dosen manages The Wayne Megill Real Estate Team of Keller Williams – Brandywine Valley in West Chester, PA. Contact Ryan Dosen to inquire about buyer or seller representation or to learn more about a career in real estate by emailing ryan@waynemegillteam.com or calling 610-399-0338.

 

This article was published by 21st Century Media and the Daily Local News (West Chester, PA). To read this article on the the newspaper’s site, please visit the Daily Local News.

To view all of Ryan Dosen’s 21st Century Media real estate columns, visit http://www.dailylocal.com/search?text=dosen.