Former builder turned private lender discusses what needs to happen for the construction market to improve
High home prices, elevated mortgage rates, and affordability challenges continue to weigh on the new home construction market. The US is running roughly four million housing units short of what it needs, according to Realtor.com data.
Foreclosures are ticking up but remain well below pandemic highs, and they do not add inventory anyway. They just transfer ownership from one person to another.
There was more bad news on the new-home starts front, with data released on Thursday. Single-family starts dropped 9% in April to an annualized rate of 930,000, the sharpest monthly decline since August, while building permits fell 2.6% to 872,000, their lowest level since then.
Robert Trent (pictured top) has been on both sides of this problem. He built homes as one of the largest homebuilders in Washington state before selling his company. He now runs Builders Capital (BCX), a private lender that has helped fill the funding void left behind when banks retreated from the construction market.
While April saw a dip in mortgage rates, it didn’t help new home starts. It’s another sign that lower rates by themselves aren’t going to spur more homebuilding.
"Mortgage rates alone won't solve our problem," Trent told Mortgage Professional America. "It's got to be a lot more supply within the market."
Affordability is being squeezed
A rate cut without more supply just moves the problem forward, Trent said.
"You take interest rates down, and I think the available inventory in the market instantly goes away," he said. "But the next problem or the next wave is going to be just another massive shortage because there's not enough housing coming behind that."
Fuel prices are up as a result of the conflict in the Middle East. Materials costs are still elevated, though not as sharply as the roughly 40% spike seen post-COVID.
"The consumer is kind of being hamstrung or affected in multiple ways," Trent said. "Which makes affordability harder and harder."
Buyers are still showing up, though, Trent said. In most markets, homes are still being absorbed because enough buyers can still afford them.
Tariffs have not hit builders as hard as initially feared. Trent said they have been resourceful about finding alternative materials suppliers, which has kept costs in check so far. But with so few units being built, costs do not have much room to fall.
"If you can build a lot more and utilize a lot more units, then I think overall the cost will start to decrease again," Trent said.
The trades shortage is part of the problem as well. When building slows, skilled workers leave the industry, and getting them back takes time.
Other experts weighed in on the latest housing starts numbers. Nancy Vanden Houten, lead US economist at Oxford Economics, said the April numbers carried some upside for the residential investment outlook, though she cautioned against reading too much into it.
"For housing starts to improve on any kind of sustained basis, homebuilders will need to work down their existing inventory of completed homes for sale," she said. "Mortgage rates have risen back to the levels of late March, and that should provide a headwind to new home sales in the months immediately ahead."
How the market can improve
Trent does not think this is a bad market, despite the volatile rate environment.
"I'd say we're in an okay market," Trent said. "It's not bad. It's not great. COVID was an extreme case where house inventory went away kind of overnight. But I'd say now we're kind of back to normal-ish levels, like 2016 to 2019 levels."
In markets where people want to live, where jobs are plentiful, and people are still moving in, buyers are there and homes are still getting absorbed, he said.
"The concern is there's just not enough stable inventory being built," Trent said. "If you get back to a huge surplus of buyers, you've got a whole other issue where affordability gets shot again because there's no supply out there."
As far as measures that would help make tangible improvements to the market, Trent noted that an end to the war in Iran would cause fuel prices to fall. This could force rates back down. However, issues on the supply side need more than lower rates.
"Really, a few things have to happen," Trent said. "Rates have to eventually come back down. That's part of the equation. But really, the major part of that equation is building a lot more supply and getting the cost of housing down. You can't have one without the other."
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