In early August, the Biden administration reduced Canadian lumber tariffs by more than half, from 17.99% to 8.59%. But the welcome news for builders has been overshadowed by a sudden slowdown in new-home construction.
Throughout the pandemic, lumber inflation was emblematic of widespread supply-chain woes. According to the National Association of Homebuilders (NAHB), the skyrocketing price of softwood lumber has added, on average, $14,345 to the price of a new home.
Since the onset of the pandemic, developers and agents alike became accustomed to a high-priced, competitive housing market. But after two unusual years, that hot market has begun to slow. With higher mortgage rates postponing many purchases indefinitely, sales are suddenly down, forcing homebuilders to cut back on plans.
During Q2 of 2022, D.R. Horton, the nation’s largest homebuilder, reported that about 24% of new home orders were canceled. The third-largest homebuilder, PulteGroup, revealed that cancellations increased to 15% in Q2.
Lennar, the second-largest homebuilder, reported a surprising year-over-year order increase of 4%. But their spokesperson, Executive Chairman Stuart Miller, shared a modest statement. “The weight of a rapid doubling of interest rates over six months, together with accelerated price appreciation, began to drive buyers in many markets to pause and reconsider,” Miller said.
According to the real estate consulting group Zonda, roughly 87% of builders are currently slowing the pace of construction. Another estimate, from John Burns Real Estate Consulting, predicts that builders will take out between 5% to 10% fewer permits for new homes over the next year. “Builders are saying, ‘We’re going to wait and see how the market progresses,’” Zonda Chief Economist Ali Wolf told Realtor.com.
It’s a serious shift from the start of this year when eager buyers were joining waitlists to own new homes. Before the Fed’s mortgage rate increase, some builders were even holding lotteries to determine who might win the chance to purchase property. As detailed in a recent piece from Realtor.com, now, the tables have turned. Builders are even offering buyer incentives, including additional amenities, the shouldering of closing costs and, in some cases, lower prices.
Still, it’s often not enough to make homebuying affordable in this climate. And in turn, the rental market is experiencing a substantial boom. New construction in that sector continues at a historic rate. By the end of this year, 420,000 apartment units are expected for delivery nationwide, just shy of 2021’s 423,000 units. Last year marked a 50-year peak for apartment construction; 1971 was the last year to surpass 400,000 units.
Amid steadily increased inflation, demand for apartments is strong enough to overpower the supply chain disturbances. Doug Ressler, manager of business intelligence at Yardi Matrix, told RentCafe, the industry is still affected by labor shortages, material scarcity and high costs. However, apartment construction is returning to — even surpassing — pre-pandemic levels in cities across the nation. New data from RentCafe details the comeback.
Of the country’s top 20 metros, 10 are set to reach five-year peaks in new-apartment construction during 2022, according to RentCafe. In order: New York City, Miami, Austin, Phoenix, Seattle, Orlando, Nashville-Davidson, Raleigh, Portland and Tampa. Leading the pack, New York City is seeing a particularly remarkable rise in apartment construction after residents fled the crowded metro at the start of the pandemic. There, 28,153 new rental units are expected by the end of 2022: a year-over-year increase of nearly 50%.
And while Chicago did not crack that top 10 list, apartment growth there is strong. It remains among the top 20 U.S. metros, based on statistics from RentCafe. So far, 2,100 rental units have been built this year with a total of 8,573 projected by the end of 2022. Those numbers represent a 12% year-over-year increase as construction in the city works its way back up to pre-pandemic levels. In 2017, 9,067 units were added to the Chicago metro area, followed by a decline in 2018 before an impressive addition of 10,929 units in 2019.
“People who lived with family or friends during the pandemic formed independent households as employment and savings surged,” Ressler told RentCafe, offering another perspective as to why apartment demand is surging.
And while these strides may be positive for potential homebuyers-turned-renters, homebuilders remain in a tough position. And, according to Realtor.com’s Chief Economist Danielle Hale, that leaves few options for the ongoing housing shortage. “Unfortunately, with this pullback in [home]building, that shortage is unlikely to be solved anytime soon,” Hale said.
Echoing language from the National Association of REALTORS®’ August housing snapshot, NAHB Chief Economist Robert Dietz has also labeled the current climate a “housing recession.”