New U.S. home construction rises amid drop in applications to build

DURHAM, N.C. (WTVD) -- For Durham resident Lisa Callaghan, it's only a matter of time before she moves from an apartment downtown to a townhouse in Elliott Square.

"I thought it was perfect for my lifestyle," Callaghan said.

The townhouse complex grew from when Lynn Solomon moved in 2019.

"Where we're standing right here was nothing, it was just trees," Solomon said, pointing to the construction site nearby. "Now, we're working on having a full city block."

Solomon said although the prices have gone up a lot in the past three to four years, it seems to be leveling out a little bit.

"The frenzy during the pandemic seems to be quieting down," Solomon said. "So hopefully, it'll make it more affordable to first-time buyers."

The City of Durham recorded more than 3,000 new residential units in the Fiscal Year 2021-2022.

Nationwide, new home construction rose 12.2% in August, according to government data. But despite the fast pace, applications to build declined to the slowest pace since June 2020.

"Permits are being purposely pulled back right now because there's inventory on the ground," Movement Mortgage's Richard Cohen said. "All the production builders have less foot traffic, so they're very nervous that that foot traffic's going to translate into more inventory. And inventory is expensive."

Builders are having to adjust amid labor shortages, supply chain issues and high land and material prices, according to Suzanne Harris of HBA of Raleigh-Wake County.

"They are having to maybe look at the price point of the home, perhaps provide some incentives to bolster their sales," Harris said. "Such as mortgage rate buy-downs ... free amenities or, potentially even price reductions in the home."

Zillow economist Nicole Bachaud said home builders are continuing to adjust their expectations about what the future housing market will hold.

"Housing permits were down annually for the first time since the beginning of the pandemic and down below consensus expectations, signaling that tight inventory can be expected to remain a key player in the future of the housing market," Bachaud said. "While demand is slowing for the time being, largely due to affordability obstacles, demographic factors will contribute to sustained demand for housing for years to come, and with the current trend of building activity slowing, low inventory will continue to push long-term price growth up and affordability down."

The good news for renters, however, is that multifamily starts increased to the highest level seen in years as builders focus on the rental market, according to Bachaud.

"As a result of increased rental supply hitting the market down the road, rental vacancy rates will have less pressure and rent growth will slow down," Bachaud said. "Which will be welcomed news to renters who have been fighting through a challenging rental market for several months."

Despite buyers continuing to face higher mortgage rates, realtors see no lack of demand in the Triangle area.

"Some buyers are actually feeling a little bit more comfortable about the market now and actually getting back in, regardless of the interest rates going up," AnnMarie Janni at Element Realty Group at Allen Tate Realtors said. "The inventories are increasing, but not at a bad pace. It's just more the normalizing of the market is continuing, which is great."

The Federal Reserve is expected to boost rates on Wednesday, but Cohen said he believes that by the time they do, mortgage rates will be where they are supposed to be.

"Anytime there's too fast of a move in rates, typically it'll pull back to where it started," Cohen said. "I don't think that rates are going to 8% and 9%. I believe somewhere in that 7% range, you may have a couple of bad weeks, and then I think we come back down to that 5-6% level."

Cohen said people are also looking at new construction as the way out to go back to resales.

"(New construction) slowed down in part to the fact that resales are more accessible," Cohen said. "Now that you have resales coming back, less frenzy ... new construction's getting hit temporarily. There isn't a shortage."