RALEIGH – New data jointly released by the U.S. Census Bureau and the U.S. Department of Housing and Urban Development shows that, compared to May, the sales of newly constructed homes dropped by 6.6% in June, and the median price of a new construction home was $361,800.
Data on new building permits shows a 5.1% drop nationwide in June compared to May.
But those watching local housing markets shouldn’t assume this data means home sales in the Triangle are slowing in any way, said Gian Hasbrock, a new home consultant for one of the Triangle and nation’s largest builders, and a past president of the Home Builders Association of Durham, Orange, and Chatham County.
There’s a bit more nuance required, said Hasbrock.
And, even though new construction building permits dropped nationally, city-level data shows that the total number of building permits issued in Raleigh, Durham, Morrisville and Cary increased in June, compared to May.
“To understand the Triangle market, it’s not sufficient just to look at national figures, because our fundamentals are so strong, and fundamentals in creating a marketplace have to do with demand and supply,” said Hasbrock.
On the demand side, the Triangle continues to experience growth in population, which includes in-migration from other regions by workers attracted to the high-wage industries and jobs in the region, students choosing to study at the universities in the region and retirees choosing to relocate to the area to be closer to their children and grandchildren, said Hasbrock.
“Our population growth over the last 10 years is among the top three regions in the nation, with population growth that is dramatically higher by factors of two, three, four hundred percent, than the national average population growth,” said Hasbrock.
The primary reason: jobs.
It’s not just Apple and Google who’ve announced facilities in the region. Data from the Wake County Economic Development office released earlier this month noted that since October 1, 2020, there have been 20,120 potential jobs announced in Wake County, and $4.5 billion in potential investments.
The queue is 45 projects, with nearly 9,000 additional potential jobs and $2.5 billion in potential new investment, Wake County Economic Development stated.
“That population fundamental is critical to understand,” Hasbrock said. “When you have more people, you need more housing. It has to do with jobs, and our job growth remains similarly substantially higher — close to 300 percent the growth of jobs in the nation, writ large.
“High job growth has extended back since before the sunset of the Great Recession.”
Census data shows that only four of the largest 25 metropolitan areas built enough homes to align with the growth of local jobs in the decade between 2010 and 2019. A “healthy” ratio of housing units to job growth falls between 1 and 2.
All five of the largest cities in North Carolina fall into that ratio range, according to the data set, with an eight-county region of the Triangle posting a ratio of 1.4 new jobs for every new housing unit.
Of course, that data is from before the onset of the global coronavirus pandemic.
What’s happening in new home construction
“Part of the sloughing off of new home sales, in the Triangle and nationally, is on the supply side of the equation,” said Hasbrock. “This is COVID-19 related.”
At the outset of the global coronavirus pandemic, demand for housing, especially new construction housing, dropped significantly. But when authorities deemed the housing industry as essential and its workers essential workers by May 2020, interest in new home construction actually picked up.
Potential buyers did not want to visit existing homes. Plus, many people with existing homes who may otherwise have considered listing their property for sale determined that the uncertainty around COVID-19, the hassle of showing their home, and the fact that there were not many other homes listed for sale made that a less attractive choice.
“Every avalanche starts with a little snowball going down the hill,” said Hasbrock. “Our snowball was that people were stuck at home.”
Here’s what happened, said Hasbrock. Lumber cleared off retail shelves, as people pursued DIY projects or home renovations. Because new home construction was continuing, those builders needed lumber to continue to build supply.
Demand for lumber increased. “But the problem there is that the lumber industry, just like an automobile industry, is on an assembly line, so if one person out of 20 on the line comes down with COVID-19, then the whole line is shut down, or all workers must quarantine,” said Hasbrouck.
The supply chain choked. Then, tariffs on lumber from Canada, the source of about 20% of all lumber in the housing industry, altered pricing and the supply chain as well.
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“When you have demand far outstripping supply, that puts significant pressure on pricing,” said Hasbrock. “In the local market, typically, in average in the country, a new home sale represents maybe 1 in 8 or maybe 1 in 11 of all real estate transactions.”
But again: the country and North Carolina was amidst a global pandemic. So what could have been 1 in 8, was dramatically different.
“People didn’t put their home on the market. That reduced the available inventory by a factor ranging from 50 to 70 percent, year-over-year,” said Hasbrock. “That resulted in the Triangle market having among the highest percentage of new home sales relative to existing home sales, in the country, more than double the national average.”
Pricing also inched higher, then higher, then skyrocketed, for existing home sales. By the end of the first quarter of 2021, the gap in the median price between new construction homes and existing homes in Durham, for example, had closed dramatically as existing homes increased in price, according to data from Zonda, delivered in a presentation earlier this year to the Durham Rotary Club.
“This put further pressure on builders, who were finding their costs,” said Hasbrock. The average new construction home in the Triangle, 2,400 square feet, has lumber costs alone of about $34,000. That was well higher than before.
“What builders started doing was trying to recoup their costs by raising prices on the product that the did have, and reducing the amount of product they were releasing, because typically when someone buys a home, there is a time lag, ranging around about six months,” said Hasbrock.
“Builders started thinking that if they sold a house on January 1, and closed it on June 30, when they’d absorb all the costs of that home,” said Hasbrock, that they’d be leaving money at the deal table, putting them at risk of a rapidly shifting real estate market. “Builders, defensively, were trying to protect themselves.”
“All but the largest of builders are not protected from price changes over a period of time, especially the period of time between when you sell it to when you close it,” said Hasbrouck.
While local residents may see the growth in equity in existing real estate assets skyrocketing, from the perspective of an out-of-region mover considering, say, relocation from San Francisco or Seattle to the Triangle, historical appreciation is less than for that mover’s existing home in one of those markets. Plus, that 2,400-square-foot home might be in the low $400,000 range in the Triangle, but in San Francisco, it might be $1.2 million.
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“In the existing home market, with so much demand and so little supply, that listing price was analogous to an opening bid rather than market price,” said Hasbrock. “These folks from pricier states were the determining factor in higher pricing and leaving many people locally out in the cold, because while equity increased in the Triangle, it didn’t increase in the same way that someone coming from San Francisco experienced, which created a frenzy in the market.”
The future of the housing market in the Triangle
Many people may feel concerned that the housing market is in the midst of the final stages of a bubble, said Hasbrouck. It’s understandable, given the run-up of prices that preceded the housing market crash that led to the Great Recession, he noted.
But it’s also an incorrect analysis, said Hasbrock.
Even the latest Census data on new home sales, which shows a decrease between May and June, doesn’t tell the full story, said Hasbrock, especially factoring in that national level data is rarely the best source of information about what is happening in the Triangle.
Take for instance the rate of appreciation. It’s not anomalous for appreciation gains in double digits in some markets of the county, like San Jose, San Francisco, Seattle or Boston. But what we’ve experienced in the Triangle in the last 15-18 months is more of an anomaly, said Hasbrouck.
“Over the 30 years that I’ve been in the new homes industry, appreciation has averaged closer to 4 percent in the Triangle, but over the last year, the appreciation for existing and for new homes has hit that 20 percent mark.”
According to Hasbrock, experts are continuing to project appreciation in the Triangle, with estimates for year-over-year change falling at about 8% to nearly 12%. That’s not 20%, but it’s also not 4%.
“If you look at one slice of the data, appreciation has changed from 20 percent to 8 percent,” said Hasbrock. “But looking deeper, it’s a normal reaction to something that was not sustainable, unlike the Great Recession, where the fundamentals were unsound, especially with lending.”
If anything, indicators are pointing toward a continued housing shortage. Population growth is not projected to slow, and jobs are continuing to be announced in the Triangle as companies expand their teams, open new offices or build additional facilities across the region.
In Wake County, there’s a growing gap in the real estate market
The most recent data from the Triangle Multiple Listing Service, or TMLS, shows that across the entire Triangle market, about 900 more homes sold in June than in May, up almost 25%, and the median price increased from $345,000 to $357,000.
Yet the number of new listings increased by only 300, and the projected months of inventory of supply of homes is still historically low, with half a month’s supply. A balanced real estate market would have between 5 and 6 months of inventory on the market, said Hasbrock. In the Triangle, we’re now measuring inventory in weeks.
There’s an analogous indicator in new home construction, noted Hasbrock, that tracks the number of available home sites that could be developed into new construction homes. In the Triangle, there’s currently a projected 13,000-14,000 total home sites.
That means that there’s a lot of “lot supply,” said Hasbrock. But it’s well below what would be needed. Lot supply in a balanced market is typically upwards of 24 months.
The result?
“Pressure on builders not wanting to rush homes to market at pricing that might fool them down the road, because the supply chain is still erratic and unpredictable,” said Hasbrock.
So don’t expect a slowing of new construction homes to be an indicator of slowing demand in the housing market. It could be the opposite.
