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It is no exaggeration to say that the COVID-19 pandemic has ushered in an era of economic turmoil and brought challenges to various sectors. Real estate bond investors, known for accumulating wealth gradually, are still experiencing strong investment returns amid the pandemic. However, investors faced fewer opportunities.
Buyers experiencing a lack of housing inventory and intense competition, and investors navigating economic uncertainty, aren’t the only ones dealing with obstacles brought on by the pandemic. The home construction industry faces supply chain disruptions, labor shortages, rising construction material costs, high interest rates, and government regulations, creating major obstacles to new construction projects.
according to June 2020 poll conducted by Associated General Contractors of America, 68% of contractors have experienced a project cancellation due to the COVID-19 pandemic. 48% said their project had started before the pandemic stopped.
Due to the pandemic, there remains a strong demand for new construction to alleviate the stress of unaffordability for most buyers. While the housing construction rate continues to decline, Even if I fall a littlebuyers and investors alike continue to wonder when new construction will reach a level where market pressures will begin to ease.
Facing a worsening housing shortage
Low inventory and high interest rates have been the main factors shaping the real estate landscape over the past three years. The lack of available housing set off a chain reaction that caused prices to rise to unprecedented heights.
Nevertheless, prospective home buyers continued their search, even as affordability became increasingly out of reach for the average buyer. The result is relentless competition, driven by the harsh reality of a housing shortage.
According to Realtor.com, from 2012 to 2023, the gap in single-family home construction and household composition will increase. Expanded to a whopping 7.2 million units. If you include multifamily construction such as apartments and townhomes, the difference narrows to 2.5 million units, but it’s still a dramatic number.
Household formation refers to the change in the number of households from one year to the next and is useful in determining demand for new housing. For example, someone who moves out of their parents’ home and enters into their own rental agreement is an example of household formation.
It would be historically inaccurate to attribute the current housing crisis solely to the COVID-19 pandemic and its aftermath. COVID-19 has exacerbated many problems, but the roots of many problems go back even further. As a result of the 2009 housing crash, the United States experienced more than a decade of under-construction relative to population growth.
It took more than 11 years, until 2020, for the industry to fully recover. Then, just as housing construction was getting back on track and returning to its pre-2009 pace, the pandemic hit and halted progress.
As we move through the pandemic, the housing market will recover, albeit gradually, and may face additional challenges before improvements become evident.
Facing new realities in the real estate market
The concept of a “new normal” has permeated many sectors over the past four years and has had a dramatic impact on the real estate market. Surprisingly, just 25% of prospective buyerswas inquiring about new homes in the neighborhood as of the second quarter of 2023.
According to the National Association of Realtors (NAR), a quarter of buyers expressed a preference for new construction, but only 13% ended up buying a new home, and 87% chose an existing home.
Although the shift to buying new homes is gradual, this trend is more a reaction to current market conditions than a reflection of preference. The prevalence of new construction purchases is driven primarily by wide disparities in supply levels. 8.3 months of supply for new homes compared to just 3 months for existing homes, as of March 2024. Building new homes has become a viable option for buyers and investors.
Despite rising prices and interest rates, demand for housing remains strong, and buyers are willing to jump through hoops to become homeowners, resulting in even more competition.
New home construction is likely to accelerate as supply chain issues are resolved, supply costs fall to pre-pandemic levels, and labor shortages ease. This development is particularly encouraging for real estate investors.
Why investing in new construction is wise
The truth is that only new home construction can meet current (and growing) demand. There’s no way around it. NAR forecasts that new home sales will 13.9% increase in 2024up from 12.3% in 2023.
However, even if the inventory of existing homes increases, it will still not be enough to fill the gap between supply and demand. Stimulating this market will require a significant reduction in interest rates, a well-understood decision as existing homeowners are reluctant to sell and forgo low mortgage rates prior to 2022. is.
If you look at major investors such as Berkshire Hathaway, led by CEO Warren Buffett, you will notice that recently Acquired a large stake in a prominent real estate company Research by DR Horton, Lennar, DVR and others shows promising signs for the future of the construction industry. The multinational conglomerate holding company purchased a total of more than $800 million in stakes in prominent real estate companies last year.
Even Howard Hughes CEO David O’Reilly 2024 is being called the “golden age” of housing construction.. When asked to clarify his thoughts, Mr. O’Reilly simply said that “demand far exceeds supply” and that countless buyers in the market are rushing to purchase homes. Mentioned.
This strong demand, coupled with limited existing homes for sale and developers offering buy-back mortgage rates on new homes, makes it ideal for home builders who see high demand. environment is being created. Howard Hughes’ confidence in new construction is evidenced by its involvement in projects such as: 37,000 acre brand new community The project in Buckeye, Arizona, named Terra Vallis, is scheduled to open in 2025, along with numerous other single-family and multifamily developments across the country.
How to invest in new construction
The great news is that you don’t need Howard Hughes or Berkshire Hathaway-sized capital to invest in new home construction. In the digital age, the rise of fintech and alternative investment platforms has made investing in real estate construction accessible to individuals from a variety of backgrounds, whether accredited or unaccredited. This democratization of private real estate investing has opened many doors for new investors seeking passive income.
Investing in new home construction has traditionally required large amounts of capital, extensive industry connections, thorough market and builder research, securing financing, monitoring developments, and processing large amounts of paperwork. , and often without a clear end date. However, alternative investment platforms have streamlined much of this process, handling much of the manual labor on behalf of investors and greatly simplifying the investment journey.
final thoughts
Demand for new construction continues to be strong due to a persistent housing shortage and intensifying competition for buyers. As the market gradually recovers, some are optimistic that new home construction will accelerate as supply chain issues are resolved and labor shortages ease. This presents a promising opportunity for real estate investors, especially as alternative investment platforms democratize access to the sector.
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Note by BiggerPockets: These are the opinions expressed by the author and do not necessarily represent the opinions of BiggerPockets.