We Need to Keep Building Houses, Even if No One Wants to Buy

By Conor Dougherty and Ben Casselman | The New York Times

The United States has a deep, decades-old housing shortage. Also, at the moment, homebuilders across the country are pulling back on development because they can’t sell enough homes.

How can both of these things be true? That riddle is at the heart of the boom-bust nature of housing, where an excess of regulation and the mixed incentives of the market mean there is never a supply that lines up with demand. One way or the other, solving it will require more building during downturns, and, most likely, some sort of public program to subsidize it.

Consider what the past few months have visited on Hayden Homes, a regional homebuilder that is based in Redmond, Ore., and builds about 2,000 houses a year throughout the Pacific Northwest. At the beginning of the year, Hayden’s biggest problem, shared by almost every other U.S. homebuilder, was figuring out how to supply enough houses for everyone who wanted one.

The company couldn’t find enough land, workers were scarce, lumber prices were exploding, and the faltering supply chain turned the search for everything from dishwashers to garage doors into a kind of corporate scavenger hunt.

The one thing builders were not short on was qualified buyers, who were in abundance because of low interest rates, high household savings and the sudden ability for millions of workers to set up home offices wherever they wanted. To deal with the crush of demand, builders like Hayden began choosing buyers from waiting lists or conducting elaborate lotteries to pick a “winner” from the crowd.

Now, in the space of a few weeks, the situation for Hayden, and the housing market, has reversed. Interest rates on the average 30-year mortgage have jumped to about 5.5 percent, from about 3 percent at the start of the year. That has added hundreds of dollars a month to the typical house payment and disqualified many buyers. At the same time, a broader slowdown in home sales and price gains have caused many would-be purchasers to pull back for fear of buying at the market’s peak.

Following a steep decline in sales for June, and after watching its waiting lists dissipate, Hayden is rejiggering its inventory to emphasize smaller, cheaper dwellings, and ratcheting back the number of already-built “spec homes” it produces. All of this is happening even though the ranks of prospective buyers are still broadly employed, still sitting on a down payment and still dreaming of a new home.

“We would rather forgo a few sales in the future than be stuck with homes we are unable to sell now,” said Deborah Flagan, a vice president at Hayden.

The problem facing Hayden and other builders is simple: Sales of new homes are falling — down 15 percent this spring from a year earlier — at the same time that a wave of homes, begun before the jump in interest rates, are hitting the market. The number of homes that have been completed but not yet sold hit a 15-month high in May. Redfin, the real estate brokerage, recently reported that buyers are trying to back out of sales agreements at the fastest pace since the early weeks of the pandemic.

“Demand has slowed enough that builders are finding themselves with homes and no buyers for them,” said Ali Wolf, chief economist with Zonda, a housing data and consulting firm. “That is a problem we haven’t faced in years.”

Developers are responding the way Economics 101 says they should: by cutting prices on the houses they have already built, and by pulling the plug on virtually any project that wasn’t already too far along to be abandoned. Builders started construction on about 93,000 single-family homes in June, down 16 percent from a year earlier.

“Very smartly, builders are saying hey, let’s rein it in,” said Rick Palacios Jr., director of research for John Burns Real Estate Consulting. “Yes, we are undersupplied from a structural standpoint, but when rates roughly double in the space of three or four months, builders don’t care. They are planning their business for the now.”

If the slowdown continues for more than a few months, as many economists predict, the next step will be to cut back on future land development. The likely effect of this would be that when housing gets going again, builders will remain behind. So families will once again be clamoring for homes, getting one will once again depend on winning a lottery — and the housing shortage will continue to crush family finances and make it harder to build wealth.

“This is going to have a significant impact on future supply,” said Randall Lewis, a principal at the family-owned Lewis Group of Companies, a developer of master planned communities in California and Nevada. Mr. Lewis’s company takes raw land and over the course of decades adds basic infrastructure like sewers, streets and traffic signals. When companies like his pull back, the number of lots homebuilders can use in the future declines.

“We are now saying we’re going to look project by project and say which ones are we are going to go ahead on and which we are going to take a pause on,” he said. “As a developer, the question is, how much money do you want to put in the dirt when you don’t know what the future is going to hold?”

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