New Homebuilding Thrives on Low Interest Rates

A large, national homebuilder opened a new subdivision of large homes several months ago. There were so many specs started that I wondered if they were going to have trouble moving their product. The Sales Manager at the project stated that they liked to start their subdivisions with 40 spec houses at one time.

At the time there were lots of "Available" signs, and very few "Sold" signs in front of completed and under-construction homes. I decided to keep an eye on the project because I thought they couldn't possibly sell all those houses as quickly as I was informed they would sell by the Sales Manager.

I returned a couple of days ago. I was more than surprised. They had finished a lot of homes, and they had started a whole lot more of them. Some homes were obviously occupied, and there were "Sold" signs in front of most of the completed and under-construction homes.

The Dallas/Fort Worth inventory of existing homes is over 47,000 units - more than twice as many as we had at this time in 2000. A lot of people are buying new homes. So what's up?

The answer is interest rates. When rates are in the 5%-6% range, new homes are affordable; and even if a new 3,000 s.f. home costs more than a 3,000 s.f. used home, the rates are so affordable that the difference in payments is a non-issue for many buyers. After all, most people would rather buy a brand new home than one that's 10 years old.

When rates go up, as they eventually must - for many reasons, but mostly because of the Fed and its propensity to overprint dollars - builders with huge inventories could face tough times.

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