CENTRAL VALLEY – New home construction is still lagging from the previous two years but may pick up as interest rates begin to fall.
Homebuilders constructed almost 30% fewer single-family homes in the Central Valley in the first half of 2024. As of July 25, builders constructed 2,178 homes in Madera, Fresno, Tulare and Kings counties compared to 2,986 during the same period in 2023. Statistics are from Construction Monitor, a trade industry website tracking commercial and residential building. For the same time frame in 2022 builders permitted 2,917 new homes.
Builders and homebuyers alike have been constrained by high interest rates that have only started to fall in the past four months.
Now they are dropping more this month.
As of April, the average rate for a 30-year fixed mortgage was 7.05% compared to 6.31% as of July 31, according to Zillow, an app tracking house prices and mortgage rats. With the Federal Reserve expected to reduce interest rates for the first time this fall, mortgage rates should continue to drop, experts say.
Thirty-year fixed mortgage rates parallel the 10-year Treasury yield which has dropped from 4.70 in late April to 4.03 this month after the Fed’s more recent Federal Open Market Statement. The July 31 statement said it did not reduce the interest rate range but did say “Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have moderated, and the unemployment rate has moved up but remains low. Inflation has eased over the past year but remains somewhat elevated. In recent months, there has been some further progress toward the Committee’s 2% inflation objective.”
In June, Zillow estimated there was a nationwide shortage of 4.5 million homes last year, an increase of 200,000 from the previous year. At its core, the housing market is driven by supply and demand. When the number of people who want a home increases faster than the number of homes available, prices go up. This balance reached a tipping point when the Great Recession ushered in a decade of underbuilding and millennials — the biggest generation in U.S. history — reaching the prime age for first-time home buying. The result has been worsening affordability, now exacerbated by stubbornly high mortgage rates.
“The simple fact is there are not enough homes in this country, and that’s pushing homeownership out of reach for too many families,” said Orphe Divounguy, senior economist at Zillow. “The affordability crisis extends to renters as well, with nearly half of renter households being cost burdened. Filling the housing shortage is the long-term answer to making housing more affordable. We are in a big hole, and it is going to take more than the status quo to dig ourselves out of it.”
The pandemic-era housing frenzy sparked a construction boom, but thus far, that boom has fallen short. In 2022, 1.4 million homes were built — at the time, the best year for home construction since the early stages of the Great Recession. However, the number of U.S. families increased by 1.8 million that year, meaning the country did not even build enough to make a place for the new families, let alone begin chipping away at the deficit that has hampered housing affordability for more than a decade.
One indicator of housing affordability is how strict a region’s land-use rules are, new Zillow research shows. Those who live in highly regulated housing markets, as defined by the Wharton Residential Land Use Regulatory Index, are less likely to be able to afford the mortgage payment on a typical home in their metro, even in markets with higher-than-average incomes. This is because housing supply persistently falls short.
According to the U.S. Census Bureau, roughly 1.45 million homes were completed in 2023. The increase over 2022 is a sign of progress, but much more needs to be done.
Reforming zoning rules to allow for more density is key for more homes to be built. Experts overwhelmingly agree that relaxing zoning laws is one of the best ways to improve affordability, and these types of measures have broad support among homeowners and renters. Even adding a modest amount of density in the country’s biggest markets could create millions of new homes.
More steps in the right direction include eliminating or reducing parking requirements and minimizing delays in approval of building permits, Zillow concluded.
