Bought before they’re built: Advance new home sales highest since 2005

by Jason Porterfield

The demand for housing is so high that buyers are purchasing homes before they are built in numbers not seen in more than a decade, according to a recent study by Zillow.

Zillow found that work had not even begun on 38.5% of new-construction homes sold in October. Year-over-year, that number is 10% higher and at its highest point since 2005. In all, nearly one million new homes were sold in October. Slightly more than one million were sold in August and September combined. It was the strongest three-month period for new home sales since 2006.

“Low mortgage interest rates, a growing need/desire for more living space in a work/school-from-home world and a wave of young adults aging into their prime homebuying years have all helped fuel a surge in home sales since the spring,” the report stated. “And an ongoing shortage of existing homes on the market has made newly constructed homes especially desirable.”

The housing sector has remained strong for much of the year, quickly rebounding in the months following the initial wave of economic shutdowns at the beginning of the COVID-19 pandemic. Of homes purchased in April, roughly 20% existed only on paper.

The high number of advance sales points to a firm backlog of future construction activity as well as ongoing consumer spending. It also has positive implications for the tight inventory that has kept prices high, as buyers move into their newly completed homes and put their previous homes on the market.

Builders themselves expect that home sales volume will remain high in the coming months. Homebuilder confidence is at an all-time high, despite constraints such as complex bureaucratic requirements, the high cost of materials and labor and a scarcity of available land, as well as uncertainty brought about by the pandemic.

Builders are adjusting to uncertainty and scarcities by becoming more selective in their projects and are starting construction after receiving firm sales orders, rather than building on spec and hoping to find a buyer after the project is finished.

Homebuilders are concentrating on single-family homes. Zillow found that single-family home starts through October rose 73.6% from April and are higher than at any point since 2007. However, multifamily starts have increased by just 37.6% over the same timeframe. The rise in single-family home construction likely can be attributed to rising demand for more spacious houses in suburban locales, as buyers anticipate working and schooling from home.

Zillow frames the increase in new home sales and in the number of homes bought before they are built as positive signs for the economy.

“The advance purchases create a firm backlog of home construction projects that will have to break ground eventually, which means more employment stability for construction workers and momentum for the home construction industry in the coming months,” the report stated. “It also sets the stage for a steady stream of durable good purchases – think furniture, appliances and other home essentials – to come once people do move into these homes.”

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