Finding a price to call home: a new construction & residential real estate outlook
By Erica Jevons Sizemore, writer for New Homes & Ideas
Posted April 9, 2022 11:38 a.m. EDT
This is part of an ongoing series: What is Making the Triangle Area so Desirable?
Find more articles like this on www.NewHomesandIdeas.com
With nearly 25,000 people per year moving into Wake County, by 2030 another quarter million people will be living here and all of them will require housing – and this number doesn’t even take into account expansion among neighboring counties, all of which have been equally robust. Our population growth over the last 10 years is among the top in the nation, and as a result, homes across the region remain in high demand, synchronous with historically low levels of inventory. With demand far outpacing supply in the Triangle and across the country, the underbuilding that we have experienced over the last 20 years since the Great Recession has led to a housing shortage of 5.5 million units nationwide, according to research by the National Association of Realtors. Consequently, we are in need of some pretty aggressive home construction to catch up. The real estate industry is in the midst of dealing with some major challenges which impact all those involved but could have a silver lining for many in the Triangle.
New home construction simply has not kept up with the population increase across the area. Industrywide material scarcity, price increases and labor shortages have hit builders and consumers hard both with timing and pricing, although an upswing in construction is expected in 2022. The outlook is positive as the economy continues to recover from the pandemic, and the long-term growth story remains intact.
Home prices locally continue to rise and hit new area records. There were an average of 22 showings per sold property in the Triangle Multiple Listing Service (TMLS) last year, and even with limited housing supply, there were more than 1 million showings of properties in the TMLS setting both records despite a lack of homes for sale. This struggle has been going on over the last couple of years. A balanced market would require between 5-6 months of inventory, but with less than one month of housing inventory available currently, we need a lot of supply and more sellers to come to the market to bring it into balance.
National real estate appreciation traditionally averages 4-5% per year as can be seen in over 30 years of historical data, and while many locally have benefited from 20%+ increases in value in their homes over the last year, estimates for appreciation year-over-year in 2022 have fallen to 8-12% nationally – while it is not 20%, it’s also not 4%. This is a normal reaction to what is otherwise not sustainable for the market. While many believe we are on the verge of a bubble, national data and solid fundamentals suggest that is not what is happening in the Triangle, or at least not yet. It is not anomalous for real estate appreciation to hit double digit returns in some markets during various periods; real estate pundits expect our strong appreciation to continue across the Triangle although not at quite as high a rate as we experienced in 2021. Without a notable change in the area’s real estate market inventory, prices will likely continue to rise even if interest rates do as well, as we are still in a period of historically low interest rates.
Year-to-date, median sales prices for Wake County are already up 2.4%, and by April, that number could be another 5-8% as the spring market heats up. With robust competition over homes, list price is now more akin to an opening bid rather than market price. In some cases, buyers from pricier states are determining value comparative to their experience and leaving many locals scratching their heads, wondering if we have found a new normal.
To find a median priced home in today’s market is difficult. The median priced home in Wake County as of February 2022 was $435,000. In Chapel Hill, the median home sale price is now more than $562,000, and based on wages, there are fewer people who can afford to live there. With prices on the rise, home affordability for the region is reaching an all-time low – the one year difference in home prices in 2021 was more than the average household income ($80,591). As buyers lose purchasing power with a lack of affordable housing units in the marketplace, many homes falling into this category are met with competition from real estate investors and would-be buyers looking for primary residences are pushing prices up at record rates. Concurrently, more homeowners are considered equity rich than ever before, according to a report by ATTOM Data.
With Triangle prices climbing and fewer homes for sale, many believe we need to build more houses or adapt zoning to embrace smaller properties being constructed. In Raleigh, a zoning change to allow for ‘tiny houses’ within city limits was unanimously approved. Allowing developers to pursue projects with a unique mix of homes that allow for some density, like townhomes and smaller lot construction, hopes to help support affordable housing efforts. The City of Raleigh also legalized the construction of accessory dwelling units (ADUs) in 2020, praised as an important tool for affordable housing in the city and has launched a Fast-Track Dwelling Unit program targeting one of the biggest barriers to ADUs construction: costs. Through an initiative with architects and designers, the city will choose 10 designs to be used as essentially pre-approved options, estimated to save a few thousand to $10,000 for those looking to pursue this building type. As material and labor shortages continue, what was once thought to be a cost estimate to build an ADU, around $150,000, is now said to be $250,000 on the higher end. These new rules for tiny homes and legislation for the ‘missing middle’ housing types are some of the ways area legislators are attempting to solve concerns over escalating housing costs within the community.
To remedy continued supply and demand issues, we must look to new construction. Despite the Triangle area being among the highest in percent of new home sales to existing sales in the country, through November, single family home permits were only slightly up compared with 2 years ago. It may come as no surprise that multi-family unit construction, on the other hand, has nearly doubled. It has been difficult for builders and developers to create enough inventory for our influx of residents while rising construction costs and labor shortages persist. “The demand is there, no question. The money is there, no question. Our builders desperately want to meet the demand head on. It’s labor, it’s access to materials, it’s lot availability,” says Paul Kane, Executive Vice President and CEO of the Home Builders Association of Raleigh-Wake County.
One of the most noticeable construction trends of the past few years is a vast increase in the demand for and cost of labor. Concerned with product availability and volatile cost estimates, today, many builders and developers are not pricing their homes until they are completed – in the time it takes them to build, they are realizing price appreciation and anxious to protect their bottom line. Unparalleled price volatility hit the lumber market in April 2020 after Covid took hold and sawmills curtailed production in anticipation of reduced demand. When it became clear that demand would remain strong, the mills did not ramp up accordingly. The slow reaction by the sawmills combined with the massive uptick in demand by do-it-yourselfers and big box retailers resulted in prices peaking at a record shattering $1,500 per thousand board feet in May 2021. Lumber prices surged 300% from April 2020 to May 2021, increasing the cost of the average new single family home by almost $36,000, according to data by the National Association of Home Builders (NAHB). Overall building material prices have risen 28.7% since January 2020, according to a NAHB report from February 2022, and rising interest rates are likely to compound all types of costs, resulting in further pressure on construction. Even things like paint have experienced a rise in cost and scarcity of availability. Together, these things have created a perfect storm for continued price appreciation and aforementioned affordability concerns.
Traditionally new construction homes would sell for higher than existing homes in the same market, which sometimes could be by as much as 20-40% reports Knock.com, but today the price premium in the Raleigh-Cary MSA for new homes is less than $5,000 or just 1.33% above the median home sale price of an existing home sold. With increased costs for new construction and limited inventory, what one would pay for a resale property vs. new has skyrocketed. For those considering selling however, it’s unprecedented.
If you are looking to buy, however, and can find a way to pursue new construction, developer and residential real estate broker, Sylvain Dufour purports “It’s likely worth pursuing. In this market, there is an advantage to new construction, if you have the ability to wait or don’t mind being in the early stage of a new home community or build a custom home. Because we have an upward moving market, homeowners can benefit from instant equity and realize an increased value upon completion. Furthermore, unlike competition for resale homes, in many instances, you may not be bidding against the same buyers for new construction (some may not be able to buy and stay in their home, others have to move immediately or aren’t willing to rent in the meantime), you can lock in on rates, and at the outset you will have a newer product which will likely maintain a greater value when price appreciation calms than older resale homes.” To do so, this may require looking at areas outside the immediate city centers depending on your budget.
If you are considering building a new home or looking at new construction for your next home or investment, here are a few tips to manage the challenges you might find…
- Take a hard look at your budget and location needs
- Do your homework and find a builder who will help keep you informed
- Be patient and understand that availability is still strained on labor and materials
- Be aware of issues with supply and demand and how that may impact your build
- Be flexible and realize that some items may be on backorder and prices may have changed or be revised in your pricing
- Know who to talk to and consider employing the assistance of an experienced real estate professional to assist with evaluation, timing and execution
Despite recent challenges, an increase in housing starts, strong economic outlook and population gains throughout the Triangle should bolster the real estate market and construction industrywide for what is to come. Before the pandemic, the eight county region posted a ratio of 1.4 new jobs to every new housing unit. With efforts being made to increase new construction to meet demand and the pandemic outlook drastically improving, 2022 looks to be a year of reemergence and growth after a turbulent period of adjusting forecasts and changing expectations. For new and existing area residents, equity and opportunity remain amid the scarcity when looking to find a place to call home.
Erica Jevons Sizemore