Buyers Buying Homes Faster Than Builders Can Build
At the current rate of expansion, the 2016 housing market will outpace even this year’s torrid pace.
According to the government, September’s Single-Family Housing Starts rose to 740,000 units on a seasonally-adjusted annualized basis.
The reading marks the 12% improvement over last September’s reading; and, a huge gain over the rolling, 12-month average.
New construction continues to gain favor with today’s home buyers and — with current mortgage rates low — demand remains strong.
Home builders report more foot traffic from prospective home buyers through model units than during any period in the last 10 years.
If you’re a renter or first-time buyer, or a repeat buyer looking to “move-up”, consider moving up your time frame for a purchase. Prices for new homes are rising, and mortgage rates are expected to climb into 2016, as well.
The best deals in new construction housing may be the ones you find today.
Single-Family Housing Starts Rise 12%
Each month, the Census Bureau, in a joint release with the Department of Housing & Urban Development (HUD), issues its New Residential Construction report.
Included in the report is data on building permit issuance nationwide, as well as the number of new homes on which ground has been broken.
For today’s active home buyers, and next year’s prospective buyers, both of these data points are important, as they affect home prices in many U.S. markets.
The section covering Building Permits matters because permits are a precursor to construction. As the number of building permits increase, we can assume that, in the near-term, home supply will increase, too.
When home supply rises without an offset in demand, home prices often fall.
Similarly, Housing Starts data matters because it’s the actual construction of homes for which permits have been issued.
In this way, Building Permits are a leading indicator for Housing Starts, which is a leading indicator for the housing market, in general. There is often a direct relationship between permits and starts.
This is why the most recent Census Bureau data matters to buyers — both Building Permits and Housing Starts show strong gains as compared to last year and, coupled with another homebuilding data set, the Housing Market Index (HMI), 2016’s housing market may shape up to be the best in over a decade.
Building Permits for single-family units are up 7 percent from last year; and, Housing Starts on single-family homes are up 12 percent.
Homebuilders Not Building Fast Enough?
Data from the Census Bureau shows that builders are responding to this year’s strong housing market. More permits are being issued and more homes are being built.
However, builders also appear to be “holding back” a bit, perhaps applying lessons learned during last decade’s downturn when builders found themselves with too many homes and too few buyers.
Our evidence comes from the Housing Market Index, a monthly sentiment report from the National Association of Homebuilders (NAHB).
For October 2015, the homebuilder confidence report came in with a value of 64 — the highest reading since October 10 years ago, and a 3-point rise from the month prior.
The index is on a scale of 1-100, and readings over 50 mean that U.S. homebuilders find current market conditions “good”.
The index is up 10 points in the last 5 months, and may be headed higher into 2016. Builders are experiencing huge amounts of foot traffic through their model units and home sales are projected to balloon to levels not seen since before last decade’s downturn.
For buyers of new homes, these developments may be costly.
When demand for homes is strong and buyers plentiful, builders may be less likely to make concessions on price; or, to offer incentives such as free upgrades or appliances.
Additionally, in a “seller’s market”, buyers may find huge competition for good-valued homes. This is the reverse of what buyers experienced in 2011 and 2012 when home supplies were plentiful.
Today, the supply of new homes is less than 5 months, which means that every new home for sale in today’s market would be sold by the start of spring.
Looking to buy new construction in 2016? The homes you tour today will likely be sold by the time you make an offer.
Mortgages For New Construction Homes
For buyers of new construction, there are a bevy of home loans from which to choose. Whether you plan to make a large downpayment or a small one, there are options to have you covered.
Among the popular home loan options today is the FHA loan.
FHA loans allow for a downpayment of 3.5 percent, and the downpayment funds can be gifted from a member of the family.
FHA mortgage rates typically beat rates for conventional loans by 12.5 basis points (0.125%), but may be more expensive for you over the long-run.
If you’re planning to use an FHA loan, compare the FHA to the Conventional 97 program first. FHA loans are generally most-suitable for buyers with average credit or worse.
Another popular option is the USDA loan.
Backed by the U.S. Department of Agriculture, USDA loans are also known as “Rural Loans”. However, this nickname is a bit of a misnomer. You don’t have to live in rural areas to use the Rural Loan.
USDA loans can be used in 97% of the nation’s footprint; and are only disallowed in areas with high population density. Many exurbs and suburbs qualify for the USDA loan, as do a lot of college towns.
USDA loans allow for 100% financing with no money down, so if you’re looking to minimize your downpayment, add the USDA loan to your list of mortgage options.
Another 100% mortgage option is the VA loan, which is offered to veterans of the military or those in active duty as part of the Veterans Benefits package.
VA loans require no mortgage insurance and give access to one of the simplest refinance program available — the Interest Rate Reduction Refinance Loan (IRRRL). The IRRRL waives all documentation and verification requirements, and requires no appraisal.
Lastly, consider the “piggyback loan”.
A popular option for last decade’s buyers, the piggyback loan fell out of favor with the nation’s lenders until recent focus on smarter underwriting brought it back to focus.
Also called the 80/10/10, piggyback loans are characterized by buyers having two mortgages — one for the first 80% of the purchase price and one for the next 10 percent.
Piggyback loans can be a good way for buyers to avoid paying private mortgage insurance (PMI), if the thought of paying PMI is a troubling one.