The rise in interest rates in 2022 forced many new homebuilders to adjust home prices and introduced uncertainty regarding the viability of purchasing land for new projects. Many builders have pushed the pause button on new site acquisitions, and others who are currently in escrow are asking for extensions, waiting for signs of home price stabilization.
The slowdown in site acquisitions started in 2Q 2022 and accelerated into the second half of the year. With the typical lag time between site acquisition and the start of home sales, California experienced a big drop in new home project openings in 4Q 2022 correlating with the slowing of new site purchases. 4Q 2022 had by far the lowest number of new projects grand opening in a fourth quarter in at least the last five years—including 2020, when COVID first hit and builders last slammed the brakes on new deals. The 66 projects that opened in 4Q 2022 were 45% below the average of the prior five years (121).
We recently conducted a survey among our homebuilder and investor clients asking them for their outlook on their market areas in 2023. Although the overall sentiment was generally “cautious,” by far the highest number of positive responses was some variation on the theme of “low supply,” or “less competition,” in 2023. This is a significant difference compared to the housing downturn of the mid-to-late 2000s, when supply levels were at record highs. Today, supply levels are near record lows. There are already some early signs that new home sales so far in 2023 are stabilizing and that the worst of downward home price adjustments may have already occurred. This could start giving more builders the confidence to start moving forward on new deals again.
To talk about the market viability of your next deal, please give us a call. Clarity Real Estate Advisors works with public and private homebuilders, real estate investors, land bankers, land developers, and land brokers throughout the western U.S. We decipher the nuances of real estate market trends, identify opportunities, provide market-based feasibility guidance, and help our clients make the best real estate investment decisions possible.