US Housing Market Howard Hughes CEO David O’Reilly anticipates a prosperous era for a section of the housing market, driven by an upcoming “golden age” in new home construction.
Real estate industry expert David O’Reilly highlighted the surge in home construction and new home sales this year. According to US Census data, new-home sales experienced an impressive 18% year-over-year increase in October, reaching a seasonally-adjusted pace of 679,000. In parallel, privately-owned home building permits saw a 4% year-over-year rise, reaching a pace of 1.4 million in November.
The growing demand for new homes is attributed, in part, to the ability of buyers to personalize their units, a distinct advantage over purchasing existing homes. Homebuilders are further enticing buyers with appealing incentives, such as mortgage rate buydowns. This involves homebuilders providing significant upfront payments, acting as “discount points” to reduce the mortgage rate on newly constructed homes.
In an interview with CNBC on Wednesday, O’Reilly expressed optimism about the outlook for the new home market in 2024, dubbing it the “golden age of new home construction.” He emphasized the unique advantages for buyers, including the ability to choose size and location, coupled with national home builders successfully lowering mortgage rates through buydown programs.
On average, homebuilders are reducing mortgage rates by 150 to 200 basis points, as stated by O’Reilly. Given the average 30-year fixed mortgage rate is currently around 7%, this implies rates as low as 5% for select new homes on the market, presenting a significant advantage for buyers seeking to avoid high borrowing costs.
The existing home market faces challenges due to elevated mortgage rates, resulting in stagnant existing home sales over the past year. The reluctance of existing homeowners to list their properties for sale is attributed to the desire to retain the ultra-low mortgage rates from years ago.
O’Reilly anticipates this trend will persist as mortgage rates decrease in the coming year. While lower mortgage rates will boost the incentive to construct new homes, he cautioned that rates are not declining enough to unlock existing home inventory. This warning suggests that the existing home market is likely to remain at a standstill, exacerbating the supply-demand imbalance and further driving demand for new home construction into 2024.