New home construction continues to increase as we are coming to the end of the 3rd quarter of 2019. With interest rates remaining low and the continued demand for new homes, we will likely see continued strong new home sales in 2020.
Hedgeye Housing analyst Josh Steiner, is predicting a bull market on homes through 2022. If this trend continues, we will see a high demand for new home construction for the next few years.
At the same time, we see a reduction in permits for new homes. This decline in permit requests may indicate a slowing of new home and communities. The reason behind this is due to the increased cost of acquiring land to build master-planned communities and the increase in building costs. These cost increases are cutting into the profits of builders and real estate investors and making it risky to continue building in some areas like southern California.
While the prices of homes in California are some of the highest in the nation, there is not a lot of profit left on new home construction. Many of the current communities under construction are from land acquired and approved a decade or more ago. As these developments near completion, it may be too cost-prohibitive for investors to buy new land and develop it.
Area's like the Inland Emire are seeing a large number of new homes constructed in many locations. Areas like Beaumont, Calimesa, Redlands, Murrieta, and Temecula are experiencing significant growth during the current housing boom. You can find information on many of the current developments in the Inland Empire at https://ie-realestate.com.
The reason that we see such a massive construction boom in the IE is due locating. Vast land tracts that were obtained and approved before the last housing boom in the early 2000s. Many of these land tracts are capable of building communities that will hold several thousand homes. The current developments will take a decade or more to complete, so there will be continued construction in these areas for a long time to come.
In Orange County California, there is currently a flurry of construction taking place. But these developments are much smaller and will complete very soon. Once this occurs, there will be a steep decline in new home construction.
The only things that are keeping home prices at bay are the limits on FHA loans and the supply of new homes into the real estate market. Once we see a decline in new home construction, we will see a spike in home prices. It is the result of supply and demand.