Rising mortgage rates and climbing home prices have slowed real estate activity over the past few months. But the dip in demand for new homes won’t last for long.
Two new trends in particular are lining up better numbers for the housing outlook—the reviving jobs market and the growing presence of foreign buyers.
As real estate values plummeted during the recession, foreclosed properties flooded the housing market, bringing residential construction to a standstill. Now as the final wave of those foreclosures are finally being sold—and 400,000 dilapidated homes are being demolished annually—this dwindling housing supply, coupled with a pent-up demand for building, should prime the U.S. for new housing construction rates to rise over the coming year.
Where is this demand coming from? Typically young people purchase a home soon after joining the workforce, generating demand for about 1.5 million new housing units annually. But over the past few years, a difficult job market held the rate of new household formation abnormally low—under a million per year.
This considerable backlog of demand for new housing is starting to mobilize. Approximately 4.5 million workers under the age of 50 are expected to rejoin the strengthening labor market, and forming a household is a major priority for many of those reemployed. One of the indicators substantiating this surge in demand is the rapid recovery of construction for multi-family residences, which indicates growing demand for rental properties, the traditional entry point for newly-created households.
A less-talked-about source of demand for housing is a growing number of foreign nationals looking to purchase second homes in the U.S. The weak dollar makes American real estate more affordable for affluent buyers from developing nations. While the precise impact of foreign buyers is difficult to measure, a gap between housing starts (the beginning of the foundation of a new home) and the rate of new household formation (at least two individuals starting to live together) shows that non-residents account for a significant share of home sales.
While the demand may rise and construction will rebound, it’s important to note that new homeowners are borrowing on less generous terms than years past. Cautious lenders have adopted stringent requirements for new mortgages. But these financial obstacles have done little to diminish the underlying demand for housing. As the recovery gains momentum, demographics will once again drive demand for new homes, and residential construction activity should return to historic levels.