Mortgage interest rates are high, making homes less affordable – and reducing demand. Builders have responded by constructing fewer homes.
Approved home permits have declined substantially in recent years, with total approved housing down 41% in the first five months of the year compared with the same period two years ago, according to data from the Census Bureau.
“Since interest rates went up pretty dramatically back in the summer of 2022, the homebuilding industry and the buyer demand has impacted pretty dramatically,” said John Covert, director of land services with Cushman and Wakefield, a large real estate firm. “So with rates going up and home prices going up at the same time that’s usually not a very good scenario for housing demand.”
There were 9,298 approved single-family home permits in Colorado through the first five months of this year, down 36% over the same period in 2021, when builders got 14,734 approvals.
The decline is even more pronounced in planned multifamily apartment construction, down 54% over the last year. Covert said that that’s in part because of the high levels of apartment construction over the last few years.
“So new development has really slowed to wait for those units to be absorbed in the market,” said Covert. “But rent rates remain relatively healthy and stable, in part because people are delaying purchasing a home, so they’re living in their rental units longer.”
New homebuilders, in particular, have adjusted to high mortgage interest rates with incentives for buyers. One of the largest homebuilders in Colorado, Lennar, reported in its most recent investor conference call that the company has a variety of tools to help bring costs for buyers down.
“New homebuilders have worked out incentive structures that range from interest rate buydown to closing costs pickups to price reductions designed to meet the purchaser at their intersection of need and affordability,” said Stuart A. Miller, CEO of Lennar. “Those incentives have increased and decreased as interest rates have moved up and down.”
And that’s a substantial advantage over sellers in the existing home market who don’t have the deep pockets of a large corporation to reduce housing costs in the face of high interest rates.
Covert, the housing analyst, said that is giving homebuilders optimism.
“Homebuilders, we like to say, are generally always optimistic, because there’s always a challenge in the market,” Covert said. “There’s never a market where there’s not challenges.”
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