The current housing market has been riddled with high mortgage rates and a limited inventory of homes. The National Association of Realtors® recently reported that existing home sales decreased by 2.2% from June to July, and were down 16.6% from last year. Inventory levels were up 3.7% from June but down 14.6% from a year earlier. The housing market in Virginia is experiencing a similar situation with fewer sales and active listings on the market. These factors have led some potential buyers to search for an alternative solution to their lack of choices in the existing home market: new construction.
New Construction on the National Level
Building permits for new residential construction reached 1.44 million in July, up 0.1% from June but down 13.0% from July 2022. For single-family homes, permits increased from 924,000 in June to 930,000 in July. Single-family starts were up 6.7% month-to-month and 9.4% higher than July of last year, which is a glimmer of good news on the supply front.
New residential sales also went up in July with 714,000 homes sold, a 4.4% increase from June and 31.5% higher than the previous year. As homeowners continue to hold on to their homes and lower rates in what many have called the “lock-in effect”, the amount of existing inventory will continue to remain tight amid strong buyer demand. The rise in single-family permits and starts shows how builders are trying to bridge that gap between inventory and housing demand, but affordability continues to remain a challenge for them. According to the National Association of Home Builders (NAHB), builder confidence fell to 50 in August after increasing over the last seven months, an indicator that rates coupled with rising construction cost and supply chain issues have dampened builder sentiment. Despite this outlook, the share of homebuilders using incentives to attract would-be buyers into new homes went from 52% in July to 55% in August.
Building Permits in Virginia
In July, the total number of building permits in Virginia reached 2,561, lower than last year’s total of 3,556 and down from June’s permit count of 3,252. The number of permits for single-family homes was lower this month at 1,760 permits, dropping 7% from June and 2.9% less than the same time last year. With the number of new listings in the state down 20.3% in July from the previous year, building permits will be a key indicator to watch as builders attempt to increase housing inventory.
In Northern Virginia, there were 6,806 single-family building permits issued year-to-date (January 2023 through July 2023), falling by 13% from a year ago. Permits for single-family homes also dropped off in the bigger metro areas such as Richmond (-12.8%) and Virginia Beach (-11.6%) during this same time period. Smaller metro areas, such as Lynchburg, saw the biggest growth in single-family permits with 461 permits authorized, up 47% from last year. The number of authorizations for single-family units also grew in Blacksburg-Christiansburg (+27.8%) and Winchester (+22.3%).
Although we are seeing some growth in new construction in smaller areas of the state, it is not enough to meet the present level of demand in the market. The lack of supply will continue to put upward pressure on housing prices as mortgage rates surge above seven percent pushing potential home buyers to the sidelines.