New Home Construction Is Down -- and That's Bad News for the Housing Market

by Maurie Backman | Updated July 19, 2021 - First published on June 27, 2021

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Two women speaking with the builder in front of a partially constructed home.

Image source: Getty Images

Homes aren't being built at their usual pace, which could tighten the market for buyers even more.

At a time when there's been such heavy demand for homes, you'd think new construction would be booming. But actually, new home builds are on the decline.

Single-family home construction dropped more than 13% in April compared to March, according to the U.S. Census. That's the steepest decrease since April of 2020, when the pandemic was new and virtually the entire economy was forced to shut down overnight.

Why is home construction down?

A big reason new home construction has slowed has to do with rising materials costs. Lumber, for example, has been in short supply during the pandemic, which has, in turn, caused its price to skyrocket. Steel and copper costs have also gone up, making new construction a more expensive prospect. And while home builders have the potential to pass those costs on to buyers, some may not be willing to bite.

A shortage of skilled labor has also led to a decline in construction. In fact, right now, a lot of industries are grappling with labor challenges, which is why some states have pulled the plug on boosted unemployment.

What happens to the housing market?

Right now, there's a record-low number of homes available on the housing market. That, combined with extremely competitive mortgage rates, is driving up buyer demand. As such, home prices have soared over the past several months, making it more difficult for potential buyers to become property owners. If new home construction continues to slow down, it could make an already tight housing market even tighter, giving buyers fewer options and driving home prices up even more.

To be clear, new construction is not necessarily a viable alternative to buying an existing home. The rising cost of building materials is making newly constructed homes more expensive than ever. But still, new homes do add inventory, and at a time like this, that's essential.

Will new home construction pick up soon?

Whether new home construction picks up in the coming months or not will hinge on a host of factors, the cost and availability of building materials perhaps being the most significant. But given the way things look now, frustrated buyers in today's market may want to sit back and put their home searches on pause.

Right now, there's just not a lot of inventory available, and waiting things out could make for a less stressful experience. The good news is that mortgage rates are expected to stay low for quite some time, so waiting to buy won't necessarily mean getting stuck with a worse deal in that regard.

What's more, the severity of hurricane season could also impact new home builds in the coming months. There's really no way to predict whether new construction will continue to decline or not, but buyers may want to operate under the assumption that newly built homes will be largely off the table in the near term, both due to a slowdown in construction as well as the price tag involved.

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