New home construction rose significantly in the months of March and April, outperforming experts' predictions while jumping nearly 41% since this time last year. Unfortunately, there are other factors that might have contributed to this jump, proving that the economy might not be recovering quite as quickly as the construction is growing.
A large part of this can be contributed to the First Time Homebuyer tax credit that expired on April 30th. It encouraged those looking for a new home to buy or build one by this deadline in order to save up to $8000 off the purchase. The surge in new home construction has taken the real estate market by storm, but permits for homes to be built this summer and fall have declined, indicating that builders feel some kind of apprehension about this trend continuing.
Compared to the month before, April saw a 5.8% increase in the annual rate of homes being built. The seasonally adjusted rate was 672,000, outperforming even economists' best predictions of 655,000 homes. Among these, there were 593,000 new single family homes under construction. Considering that new single family homes comprise the majority of the market, this 10.2% increase in this sector from the month before is a significant indicator. New multi-family homes - defined as buildings with five or more units - had a rate of 68,000 as well.
Though actual home construction is a at a high compared to recent times, the amount of permits filed for future construction dropped in April. Compared to March's 685,000 new permits, April permit filing dropped 11.5% to 606,000 in total. This is well below economists' predictions of 680,000 for the month. Though the month-to-month comparison revealed a decrease, the amount of permits for the month compared to the same time last year is still at a 15.9% increase. This could indicate an overall trend of new construction growth despite the slight drop for April, which many attribute to the end of the first time homebuyer tax credit.
Still, economists and real estate experts forewarn of a drop ahead. Though it might have a lot to do with the April 30 tax credit deadline, there is wariness among builders, which will ultimately lead to less home construction this summer. A recently filed Senate bill looks to extend the tax credit even further, however, based on the gains it seems to have caused in both new home construction and general increased home sales.
Senate Majority Leader Harry Reid, among others, sponsored an amendment last week that would extend the First Time Homebuyer Tax Credit until September 30th of this year, which might help push home construction through the summer and hopefully add to the upwards trend nationwide.
The amendment is attached to a controversial jobs and tax bill, which may look a lot different by the time it passes the Senate floor, if it passes at all. This is not good for the future of the amendment, though it has garnered significant support in the past week since it was unveiled. The amendment's proponents argue that the extension would ensure that everyone who wants to can take advantage of the tax credit, and the new deadline would allow time for banks to process the transactions. This is especially true for short sales, which may take longer to go through since it requires the lender accepting less than is owed on the property.
Though all this refers to home construction, there are some who argue that the number of new homes being built is no longer a reliable indicator for the future of the market. In a real estate market and overall economy still reeling from the past few years, sales levels, building levels and permits have all continued to climb without the gains in jobs and wages that are supposed to propel them. These indicators have marked a bubble for the housing market more than they have pointed to a strong economy, so one must look to all aspects of the economy before placing a bet on the future of the market.
-Andrew R. Martignetti, Esq.
Information in the above article is for educational purposes only and does not create an attorney-client relationship. You should not construe this to be a legal opinion on any specific facts or circumstances, and you should not act upon this information without seeking professional counsel.
