This article is published by Connect Invest. Please read our Editorial Guidelines for more information.
It is no exaggeration to say that the COVID-19 pandemic has ushered in an era of economic turmoil and created challenges for industries. Real estate debt investors, known for building wealth over time, have seen good returns on their investments during the pandemic. However, investors are faced with a scarcity of opportunities.
Buyers experiencing low housing inventory and fierce competition, as well as investors dealing with economic uncertainty, aren’t the only ones dealing with the obstacles posed by the pandemic. The residential construction industry faces supply chain disruptions, labor shortages, rising construction material costs, high interest rates and government regulations, creating significant obstacles for new construction projects.
According to a June 2020 poll conducted by the National Association of General Contractors, 68% of contractors had canceled projects due to the COVID-19 pandemic; 48% saw a project that was started before the pandemic stopped.
Post-pandemic, demand for new construction will continue to alleviate pressures that are unaffordable for most buyers. Even as housing starts continue to stagnate or even dip slightly, buyers and investors are wondering: When will new construction reach levels that start to ease market pressure?
Facing an escalating housing shortage
Low inventory and high interest rates have been the dominant forces shaping the real estate landscape over the past three years. The scarcity of available homes sets off a chain reaction that pushes prices to unprecedented heights.
Still, potential homebuyers continue to look, even as affordability becomes increasingly unaffordable for the average buyer. The resulting ruthless competition continues, driven by the stark reality of insufficient housing supply.
According to Realtor.com, the gap between single-family home construction and household formation widens to a whopping 7.2 million units between 2012 and 2023. Including multifamily construction such as apartments and townhouses, the shortfall has dropped to 2.5 million units, which is still a huge number.
Household composition refers to the change in the number of households from one year to the next and helps determine the need for new housing. For example, a person moving out of their parents’ house and signing their own lease would be an example of family formation.
Historically, it would be inaccurate to attribute the current housing crisis solely to the COVID-19 pandemic and its ensuing consequences. While COVID-19 has exacerbated many problems, the roots of many of them can be traced further back. Since the housing market crashed in 2009, the United States has experienced more than a decade of insufficient construction relative to population growth.
In 2020, it took the industry more than 11 years to fully recover. Just as home construction was finding its footing and returning to pre-2009 levels, the coronavirus pandemic struck, disrupting progress.
As the pandemic passes, the real estate market will experience a recovery, albeit a gradual one, that may face further challenges before significant improvements occur.
Facing the new reality of the real estate market
Over the past four years, the concept of “new normal” has penetrated into various fields, which has had a huge impact on the real estate market. Surprisingly, as of the second quarter of 2023, only 25% of potential buyers were inquiring about new homes in the neighborhood.
According to the National Association of Realtors (NAR), one in four buyers expressed a preference for new construction, but only 13% ended up purchasing a new home, with 87% choosing an existing home.
While there is a gradual shift toward buying new homes, this trend is more a reaction to current market conditions than a reflection of preferences. The prevalence of new home buying depends largely on the huge difference in supply levels, with the supply of new homes standing at 8.3 months as of March 2024 compared to just three months of existing homes.
Despite soaring prices and interest rates, demand for homes remains strong, prompting buyers to jump through hoops trying to become homeowners, further increasing competition.
New home construction is expected to accelerate as supply chain issues are resolved, supply costs fall to pre-pandemic levels and labor shortages ease. This development is particularly encouraging for real estate investors.
Why investing in new construction is a smart idea
The fact is that current (and growing) demand can only be met by new housing; there is no way around this problem. According to NAR forecasts, new home sales are expected to grow 13.9% in 2024, up from 12.3% in 2023.
However, even if the inventory of existing homes increases, it will still not be enough to make up for the gap between supply and demand. To stimulate this market, interest rates must be significantly lowered, as existing homeowners are reluctant to sell and give up low mortgage rates until 2022, a decision that is entirely understandable.
Watching major investors such as Berkshire Hathaway, led by CEO Warren Buffett, recently acquire large stakes in prominent real estate companies such as DR Horton, Lennar and DVR provides a hopeful sign for the future of the construction industry. Last year, the multinational conglomerate held shares in well-known real estate companies worth more than $800 million.
Even Howard Hughes CEO David O’Reilly calls 2024 a “golden age” for residential construction. When asked to clarify his thinking, O’Reilly said simply: “Our demand clearly outstrips supply,” citing the myriad of eager buyers in the market.
This strong demand, coupled with the limited number of existing homes for sale and lower mortgage rates for developers offering new construction, has created an ideal environment for homebuilders who recognize their high demand. Howard Hughes’ confidence in new construction is evident in its involvement in projects such as Teravalis, a new 37,000-acre community in Buckeye, Arizona, scheduled to open in 2025, as well as numerous other single-family and multifamily developments across the country .
How to invest in new construction
The good news is that you don’t need a Howard Hughes or Berkshire Hathaway-like fortune to invest in new home construction. In the digital age, the rise of fintech and alternative investment platforms has made it possible for individuals from all backgrounds, accredited or not, to invest in real estate construction. The democratization of private real estate investing has opened countless doors for new investors seeking passive income.
Traditionally, investing in new home construction requires significant amounts of capital, extensive industry contacts, meticulous market and builder research, securing financing, monitoring development and processing reams of paperwork, often without a clear exit date. However, alternative investment platforms simplify much of this process, handling much of the manual work on behalf of investors and significantly simplifying the investment process.
final thoughts
Demand for new construction remains strong, driven by an ongoing housing shortage and increased competition among buyers. As the market slowly recovers, there is optimism that resolving supply chain issues and easing labor shortages will accelerate new home construction. This presents a promising opportunity for real estate investors, especially as alternative investment platforms democratize access to the industry.
Connect Invest’s short-term note portfolio model makes it easy for investors to benefit from the new construction expected to rise this year. Start growing your wealth today!
This article is provided by Connect Invest
Your connection to private real estate investing.
Connect Invest is an online investment platform that provides short-term investment opportunities. These investments contribute to a diversified portfolio of real estate projects, including commercial and residential developments in various stages.
Notes on BiggerPockets: These are the opinions written by the author and do not necessarily represent the views of BiggerPockets.
