High mortgage rates have made homes unaffordable and reduced demand, and homebuilders are responding by building fewer homes.
Census Bureau data shows that the number of homebuilding permit approvals has fallen significantly in recent years, with the total number of homes approved in the first five months of this year down 41 percent compared with the same period two years ago.
“The homebuilding industry and buyer demand have been dramatically affected since interest rates spiked in the summer of 2022,” said John Covert, director of land services at major real estate firm Cushman & Wakefield. “Rising interest rates and home prices rising at the same time is typically not a very good scenario for housing demand.”
Colorado approved 9,298 single-family home building permits in the first five months of the year, a 36% decrease from the same period in 2021, when builders received 14,734 approvals.
The decline in planned multifamily construction was even more pronounced, down 54 percent from last year, which Covert said is in part due to high levels of multifamily construction over the past few years.
“So new development has been very slow as we wait for those properties to be absorbed by the market,” Covert says, “but rents have remained relatively healthy and stable, in part because people are delaying home purchases and staying in rented properties longer.”
New homebuilders, in particular, have responded to high mortgage rates with incentives for buyers. Lennar, one of Colorado's largest homebuilders, reported in a recent investor call that it has a variety of tools it can use to help lower costs for buyers.
“New homebuilders devised incentive structures designed to meet the intersection of buyers' needs and their ability to buy, from lower interest rates to higher closing costs to lower prices,” Lennar CEO Stuart A. Miller said. “These incentives increased or decreased as interest rates rose or fell.”
And that's a big advantage over sellers in existing home markets who don't have the deep pockets of larger companies that can reduce housing costs in the face of high interest rates.
Housing analyst Covert said that gives homebuilders an optimistic outlook.
“Homebuilders often say they're generally always optimistic because there are always challenges in the market,” Covert said. “No market is without challenges.”