New report shows that housing construction decreased in March: How will prices be affected?

Although home prices have decreased since their high in early 2023, they remain well above those seen before the pandemic. On Tuesday, the US Department for Housing and Urban Development released the March New Residential Construction Report, which shows that construction on new housing units fell last month. When looking at all private housing units, including single-family homes and buildings with multiple units, the number of starts on construction projects fell from 1.5 million in February to 1.3 million in March. Regarding single-family homes, the number of new units where construction began in March was lower than in February but up 21 percent compared to the figure captured a year ago. Higher levels of construction on single-family units could help to bring prices down, so long as they are accessible to buyers looking for that type of home.

What is driving up prices?

In part, the Federal Reserve’s move to increase interest rates has contributed to the rapid price increase across the housing sector. As interest rates tick up, the cost of a mortgage also rises. Whereas in 2021, buyers were able to take out a mortgage with an interest rate below three percent, the average rate for both 15 and 30-year mortgages sits above six percent today.

While sellers may be able to sell their home for higher than they purchased it, they may be disincentivized to place it on the market if they know that the next mortgage they take on will have a much higher interest rate associated with it. On a macro scale, this behavior on the part of potential sellers reduces the supply of houses on the market, driving up their prices. As some potential buyers are priced out of the market and demand falls, prices soften, which helps to explain why prices did not continue to surge early last year.

What will it take to bring home prices down?

To bring housing costs down, the Federal Reserve could reduce interest rates, encouraging more sellers to place their homes on the market. However, the Fed has signaled that this is not the path they will take in the coming months, with concerns over inflation still pervasive within the central bank.

Another option is to increase the supply by placing new houses on the market. This second option is much more costly to developers when interest rates are high, which can disincentivize further development, further limiting supply and keeping prices high. Additionally, for buyers, construction in a high-rate environment can mean paying more for a new home, and coupled with a higher mortgage payment, many buyers may choose to wait until rates begin to fall.

Aside from actions taken by the Fed and real estate developers, political leaders can also lend their support to the question of bringing housing prices down. By increasing the stock of affordable housing, either through purchasing units or providing the funds for new developments, demand in the real estate market would fall, and facing less competition, the unit price could come down. Additionally, by scaling up public housing, those looking to become a landlord by purchasing an investment property take on a much more considerable risk because they have to compete with publically funded affordable housing programs that are not looking to extract a profit from tenants.