Interest rate spike slowed home construction, but forecast looking brighter

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By tom laWrence Special to The Pioneer

After signs of optimism in housing construction in 2022 after two tough, pandemic-impacted years, 2023 got off to a challenging and surprisingly rocky start.

The primary reason? Higher mortgage rates, as the Federal Reserve has tightened its monetary policy, leading to rising mortgage rates. It caused residential investment contracting to drop for seven straight quarters, the longest such decline since 2009.

Duane Bickett of Sioux Falls, who serves as the South Dakota Home Builders state representative to the National Association of Home Builders, said it all comes down to dollars.

“The interest rate really fueled and drove the market at that point. We keep hoping that we’ll see some reduction,” Bickett said. “The only problem with that is, a lot of times when prices drop everywhere, it really affects the pricing and then the equity of home values, too.”

He’s been in the business for 50 years, so he understands market fluctuations. Bickett said there are signs of home prices coming down, and he thinks that is the trend.

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“I think it will,” he said. “They say in some of the big metro areas, they’ve already seen some price decline in housing because people are looking to move some inventory.

U.S. home construction dropped in January, according to a report issued jointly by the U.S. Census Bureau and the U.S. Department of Housing and Urban Affairs. The decline in both building permits and housing starts compared to January 2022 was steep.

“Privately owned housing units authorized by building permits in January were at a seasonally adjusted annual rate of 1,339,000. This is 0.1 percent above the revised December rate of 1,337,000, but is 27.3 percent below the January

2022 rate of 1,841,000,” the report states. “Single‐family authorizations in January were at a rate of 718,000; this is 1.8 percent below the revised December figure of 731,000. Authorizations of units in buildings with five units or more were at a rate of 563,000 in January.

“Privately owned housing starts in January were at a seasonally adjusted annual rate of 1,309,000. This is 4.5 percent below the revised December estimate of 1,371,000 and is 21.4 percent below the January 2022 rate of 1,666,000. Single‐family housing starts in January were at a rate of 841,000; this is 4.3 percent below the revised December figure of

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879,000. The January rate for units in buildings with five units or more was 457,000.”

Housing completions, however, were up, the report stated.

“Privately owned housing completions in January were at a seasonally adjusted annual rate of 1,406,000. This is 1.0 percent above the revised December estimate of 1,392,000 and is 12.8 percent above the January 2022 rate of 1,247,000. Single‐family housing completions in January were at a rate of 1,040,000; this is 4.4 percent above the revised December rate of 996,000. The January rate for units in buildings with five units or more was 349,000.”

Bickett attended the National Association of Home Builders’ International Builders Show and Design and Construction Week, held Jan. 31-Feb. 2 in Las Vegas.

In a report on the South Dakota Home Builders website, Bickett said NAHB chief economist Dr. Robert Dietz said mortgage rates will be fluid early this year based on the Fed’s actions and the impact on inflation.

“The Fed’s determination to lower inflation is affecting the housing markets greatly in consumer confidence as well as mortgage affordability,” Bickett wrote. “He sees this year to be rocky in terms of housing starts and traffic in open houses. The remodeling market will continue to be strong with existing homeowners tapping into the great pool of equity that has increased in the last three years. He predicts the supply chain issues should ease and with interest rate drops, housing should rebound in 2024 with 2025 predicted as being robust again.”

Bickett said another topic of great interest was federal programs aimed at persuading towns and cities to adopt the most stringent energy codes seen to date.

“The claim is to ‘help’ local government officials ‘educate’ the building communities and consumers about the benefits of higher energy efficiencies without consideration of the cost factors, and in many cases, not enough research has been done to prove the claims of cost recovery or payback,” he wrote. “NAHB is working to produce a one-pager of action talking points to help builders explain the short-sighted effects of this program to consumers and local and state officials.”

Bickett said NAHB has been “very successful in getting the builder’s point of view out to the consumers and the public. He said people need to be aware of the impact of higher interest rates, higher housing costs, and the cost of regulations and their impact on the housing market and the overall economy.

Builders are concerned about new mandates on electrification, the use and the banning of natural gas, propane and fossil fuels without enough research to see the impact and short-sightedness of these sweeping initiatives. Bickett said the building industry must have a voice on these “life and business-changing proposals.”

Lee Rettig, who is in charge of new homes sales and chief marketing officer of K Construction in Yankton, said the housing market has been through a wild ride since 2020, but he is optimistic about the future.

Rettig has been with K Construction for three years and has been in the construction and home building industry since 2005.

“The rapid increase in interest rates in the third quarter last year really shook the market,” he said.

Rettig said his company lost three contracts for new houses after interest rates rocketed up in September. It takes several months to complete the process to get a mortgage, he said, and last fall, interest rates were on the rise.

When the process began, interest rates were around 3 percent. They reached 6.5 to 7 percent in September and projections called for them to be 8 percent or higher by this spring, Rettig said.

It was almost three times the in- terest rate, so they had to back out,” he said. “And that instability left people in shock, and when they are in shock, they don’t do anything.”

Rettig said he worked with one buyer last year, and by the time they were ready to complete the contract, the cost of the house had increased $30,000.

“I still built the house,” he said. “The homeowner just had to decide what to do.”

One reason the housing market continued to find willing buyers was the fact that people had more money to spend. Federal programs provided an influx of cash for millions of Americans, while the pandemic kept most at home, Rettig noted.

Since they weren’t going on vacation, out to dinner or drinks and no longer buying coffee and lunch every day, they had more money to spend on housing, he said. In addition, Rettig said, when people were forced to spend more time at home, many realized they wanted to fix up their house or buy a new one.

This demand also led to higher prices. Rettig said traditionally, the Yankton housing market was 25 percent below Sioux Falls, the state’s largest city. Now, they are on par.

He also points to an inflow of new residents who find South Dakota’s natural beauty, friendly people and political and cultural environment attractive. There is a large influx of people from Minnesota, Iowa and Nebraska, Rettig said, as well as from other parts of the country.

“We are expecting a boom in our region, the southeast region and the Yankton region,” he said.

The Black Hills remain a hot market as well, Rettig said, and Sioux Falls is growing at a torrid pace.

Millennials also are reaching their 30s, the “prime home-buying

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