Mortgage Rate Levels Boosting New Construction – NKBA

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Mortgage Rate Levels Boosting New Construction

New homes gaining share due to limited inventory of existing homes, according to recently released NKBA research.
By Elisa Fernánez-Arias

New homes have gained share of home sales this year, according to NKBA’s recently released 2023 Kitchen & Bath Market Outlook Update, which revises the forecasts made in the baseline report released in January of this year. With mortgage rates at or near a 14-year high since 2022, homeowners “locked” into lower mortgage rates as compared to current ones are reluctant to sell and move. This has led to an undersupply of existing homes for sale: in May 2023, there were three months of supply, lower than the four months required for a balanced supply. As a result, new homes have gained share of home sales this year.

New Home Sales Boosting the Construction Industry

If people are buying homes, they’re more likely to buy new construction. In May, new home sales made up 15 percent of total home sales, as compared to 10 percent in the previous year, 11 percent in 2021, 15 percent in 2020 and 9 percent in 2019. In every month this year through May, new home sales have been at their peak over five years.

This has boosted the construction industry. Nationwide, builders’ 2023 sales growth expectations have shifted from a decrease of 9 percent when we asked them in November 2022 to an increase of 7 percent forecast in April this year. Additionally, home builders surveyed in April expected to start 3 percent more homes this year, up from the decrease of 9 percent they predicted when asked in November 2022.

Builders are rapidly completing homes to meet demand and also adding to the pipeline by starting new homes at a steady pace. Completions have caught up with starts and have trended together in recent months, and the number of housing units under construction remains elevated at 1.7 million. In fact, despite improving cycle times, under construction units are at record levels — higher than they have been since the 1970s.

What This Means for the K&B Industry

In the short term, the elevated number of housing units under construction is expected to drive demand for K&B installs in new construction. New production homes are likely to be built with larger kitchens and bathrooms, according to the 2023 mid-year Market Update, while other areas will be smaller to enhance affordability.

Nevertheless, units under construction are increasingly dominated by multifamily units: as of May 2023, they amounted to about 1 million units, almost 60 percent of the total. This will temper K&B spend, since the quality of K&B products in multifamily unit construction is typically lower than in single family unit construction, making the amount of money spent on kitchens and baths in multifamily units significantly lower than in single family homes.

According to NKBA’s most recent 2023 mid-year Market Update report, the forecast for K&B new construction spending in 2023 is $111 billion. This is a decrease of 4 percent year over year, much better than the 17 percent decline in the baseline forecast reported in January.

In the longer term, lower mortgage rates will boost the housing market, to the benefit of current and new homeowners, driving up K&B spending. For example, as rates stabilize, K&B remodels can be expected to go up as homeowners tap into their record levels of home equity to complete R&R projects they had been waiting to get started on.