Are New Construction Homes Attractive Again?

New construction properties could come back in a major way in 2012 and 2013.

Few sectors of real estate were hit harder in the recession than new construction, but projections from noted economist suggest times may be changing.

According to economists from the National Association of Home Builders (NAHB) and other firms, a number of economic indicators are pointing to the conclusion that buyers are ready to pursue newly-constructed homes.

As the Wall Street Journal pointed out in a recent piece, builders closely monitor a number of economic factors that could contribute to when prospective homebuyers decide to purchase a residence. Because of the economic downturn, builders have been very cautious the last couple of years, and last year, they built only 433,000 single-family houses and 177,000 multifamily units, a far cry from the 1.3 million total units builders averaged annually since 1990, according to the NAHB’s Assistant Vice President for Forecasting and Analysis, Robert Denk.

David Crowe, though, the NAHB’s chief economist, said in the Journal article that he expects construction activity to pick up in 2012, with single-family starts projected to increase by 17 percent and multifamily by 22 percent. The large increase, he explained, is because of two main reasons. One, there is a gap between supply and demand, given how careful buyers have been since 2008, and two, Echo Boomers should be entering the market with greater force this year and will be looking for places of their own.

“You can’t live in mom’s basement forever,” Crowe said, adding that as the inventory of distressed properties falls, as it has in nearly half the country’s states, new homes will become more attractive.

Furthermore, economic trends have been very encouraging for buyers. As the Journal notes, following the collapse of the housing boom, home prices have fallen while incomes have risen, and the home-price-to-income ratio is back to its historical level of 3.2 (it had grown way out of whack during the huge price increases of the boom years). Chris Varvares, a senior managing director of Macroeconomic Advisors, told the Journal that this situation will continue through 2013, with prices remaining flat this year and growing just 1.5 percent in 2013.

Varvares warned, though, that buyers should not procrastinate. If the aforementioned tea leaves are accurate, a large number of prospective buyers could enter the market very soon, and prices may not stay as favorable in certain markets.

“I’m betting on a surprise to the upside,” Varvares said.

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