New Construction Still Dragging

New information from the U.S. Commerce Department released yesterday shows that new construction continues to be very slow, and the future outlook doesn't look much better.  Home builders built 571,000 new homes last month, a 5% decline from a month ago and the lowest level in the past three months.  Roughly two-thirds of new construction units were single-family homes.

Many economists are waiting for the new construction market to pick up the pace of building and for the market to start improving.  One major obstacle is that it is quite a bit cheaper to purchase a previously-owned home in this market, which is heavily skewed towards buyers.  While the price of a previously-owned home has fell roughly 35% over the past 5 years, the cost of materials to build a new home has been flat or rising during that same period.  This has lead to a large gap in price between previously-owned and new construction homes.

Another obstacle is tightened credit.  Cash-strapped builders have found it harder to obtain credit, a situation which halts projects that would have likely moved forward.  Even where there is adequate demand, builders can't build if they can't obtain the appropriate financing to do so.

There are at least a few reasons to have some optimism.  For one, most of the data indicates that the market is at the bottom.  When you are at the bottom, the only place to go is up!  This probably isn't very encouraging for builders themselves, but this should mean increases in new construction over the next year or two.

Another encouraging bit of news is related to our population.  As population grows, people need places to live.  With the rental market already tight, and previously-owned inventory falling, there has to be an increase in supply somewhere.  This could very easily come from new construction.  The real question becomes:  Will this new-construction be in the form of single-family homes, or more affordable multi-unit structures?  Only time will tell.