{"id":177297,"date":"2024-09-06T14:48:14","date_gmt":"2024-09-06T20:48:14","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=177297"},"modified":"2024-09-06T14:48:53","modified_gmt":"2024-09-06T20:48:53","slug":"is-a-national-construction-boom-on-the-way-in-2025","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/is-a-national-construction-boom-on-the-way-in-2025","title":{"rendered":"Is a National Construction Boom on the Way? Here’s How 2025’s Market Might Look"},"content":{"rendered":"\n

Don’t pop the champagne just yet, but one <\/span>major<\/span> economist <\/span>just<\/span> stated that he envisions the federal funds rate dropping to 3.25% once the Federal Reserve’s rate-cutting cycle is over. <\/span><\/p>\n\n\n\n

David Zervos, chief market strategist for Jefferies LLC and head of the Global Macro Division of Leucadia Asset Management LLC (LAM), said on <\/span>CNBC<\/span><\/a> after attending a Fed meeting in Jackson Hole that “getting back to neutral” was the Fed’s obvious goal. He foresaw the interest rate number being low-to-mid-3%. <\/span><\/p>\n\n\n\n

If that’s the case, hold on to your hard hats and prepare for a construction boom. <\/span><\/p>\n\n\n\n

Economists Are Divided on Whether Harris Will Help or Hurt Affordability<\/span><\/h2>\n\n\n\n

Zervos noted most of the new housing talk had come out of Vice President <\/span>Kamala Harris’ camp<\/span><\/a>, with aggressive plans for affordable homeownership\u2014including $25,000 toward a down payment\u2014for first-time buyers, which some economists fear would<\/span> cause a buying frenzy<\/span><\/a>, inflating prices even more. However, her plans to increase supply using a $40 billion tax credit to make affordable projects economically feasible for builders could also help boost supply in the long run.<\/span><\/p>\n\n\n\n

Construction Is Set to Soar for the Next Five Years<\/span><\/h2>\n\n\n\n

Fast-paced apartment construction is already the norm in some parts of America, with 500,000 units expected to <\/span>be completed<\/span> in 2024. And according to a <\/span>RentCafe study<\/span><\/a>, over 2 million new units are expected by 2028. <\/span><\/p>\n\n\n\n

So far, construction has mostly <\/span>been limited<\/span> to the Sunbelt and <\/span>New York City<\/span><\/a>. However, these are small numbers compared to the $1.53 trillion the construction industry <\/span>is expected<\/span> to generate by 2028, according to <\/span>ResearchAndMarkets.com<\/span><\/a>\u2019s latest report, including <\/span>commercial<\/span><\/a> construction.<\/span><\/p>\n\n\n\n

The Inventory Shortage Gives the Advantage to Large-Scale Builders<\/span><\/h2>\n\n\n\n

Despite the 1.5 million new housing units completed in the 12 months ending in July 2024, the U.S. still needs more inventory, with a supply of 3.8 months instead of 6 months, which is considered normal.<\/span><\/p>\n\n\n\n

The housing shortage began after the financial crash <\/span>of<\/span> 2008,<\/span> when the construction industry slammed on the brakes on new homes despite low interest rates. <\/span>This<\/span> was further exacerbated<\/span> during the pandemic. The construction boom in the Sunbelt has seen migration to these states post-pandemic in search of a lower cost of living and more affordable housing. <\/span><\/p>\n\n\n\n

Much of the new construction <\/span>is currently determined<\/span> by <\/span>big<\/span> builders, who have a monopoly in the U.S. <\/span>Ten builders are behind <\/span>the construction of<\/span> more than half of the new homes in 49 of 50 metro regions<\/span><\/a>. In <\/span>Tampa<\/span><\/a>, these builders have a more than 80% market share.<\/span><\/p>\n\n\n\n

Can Northern Cities Recover?<\/span><\/h2>\n\n\n\n

A boom in construction in Northern and coastal cities could redress the imbalance of migrating residents, but only in conjunction with lower interest rates and an affordable housing market. <\/span>New York City<\/span><\/a> recently unveiled a record<\/span> $26 billion affordable housing<\/span><\/a> budget over the next <\/span>10<\/span> years to build 500,000 new homes by 2032. <\/span>This<\/span> includes $2 billion in capital funds across FY25 and FY26 to deliver $700 million toward the New York City Housing Authority (NYCHA). <\/span><\/p>\n\n\n\n

In <\/span>San Francisco<\/span><\/a>, <\/span>tourists are returning<\/span><\/a> to the city. However, the city is still far off pre-pandemic levels, with much of its recovery tied to its struggling hotels. It remains a tough place to find reasonably priced housing despite the<\/span> $70 million<\/span><\/a> in state funding the city <\/span>recently<\/span> received for affordable housing and transit\u2014a drop in the ocean compared to New York and the overall money needed to offset a homeless epidemic in the city and California as a whole. <\/span><\/p>\n\n\n\n

Governor Gavin Newsom said:<\/span><\/p>\n\n\n\n

“We cannot solve the homelessness crisis without creating new affordable homes. Today, we’re reinvesting <\/span>more than<\/span> three-quarters of a billion dollars generated through cap-and-trade funding to build thriving and affordable communities for California families. By creating livable communities with sustainable transportation options, we can meet our state’s climate targets and our goal of providing affordable housing for every Californian.”<\/span><\/em><\/p>\n\n\n\n

Taxes and Remote Working Will Play A Big Role<\/span><\/h2>\n\n\n\n

If the Northern states cannot compete with housing prices and taxes to rival those in the Sunbelt, an exodus could continue despite more housing starts. Remote working will exacerbate the imbalance if it remains an option. <\/span><\/p>\n\n\n\n

Expensive cities like New York and San Francisco could regain their footing compared to other pricey cities because of their high-paying jobs. As the tech industry continues to demand workers return to their desks and artificial intelligence (AI) transforms the industry, expect construction dollars for affordable housing\u2014aimed at essential workforce communities\u2014to support rather than lead the city’s recovery. <\/span><\/p>\n\n\n\n

First-Time Homebuyers Will Be the Driving Force for Sales in 2025<\/span><\/h2>\n\n\n\n

Should a $25,000 down payment assistance check be available with a Harris presidency, affordable housing for new homeowners will drive the real estate market in every state. On an FHA loan with a 3.5% down payment, a new buyer could afford a $700,000 home\u2014more than a starter home in most cities. <\/span>In fact,<\/span> it would allow new homeowners to start their investment journey by purchasing a two-to-four-unit building, living in one unit while renting out the others as a <\/span>house hack<\/span><\/a>.<\/span><\/p>\n\n\n\n

Final Thoughts<\/span><\/h2>\n\n\n\n

Interest rates will determine the extent of the anticipated construction boom in 2025 and beyond. While new homeowners might take advantage of Harris’s down payment assistance\u2014should she win office\u2014with over <\/span>86% of homeowners<\/span><\/a> with mortgages paying rates under 6%, many homeowners will still be rate-locked, waiting to see <\/span>just<\/span> how low rates will go. <\/span><\/p>\n\n\n\n

The supply of new single-family homes rose to<\/span> 9.3 months in June<\/span><\/a>, so housing inventory, both rental and sales, seems set to increase. With interest rates still high, homebuilders will be willing to offload new homes rather than hold on to them for top dollar, so new buyers and investors might be able to snag discounted deals and refinance later with interior upgrades and mortgage rate buydowns\u2014all part of the negotiating process. <\/span><\/p>\n\n\n\n

However, shoddy <\/span>workmanship<\/span> is one thing to be wary of amid a construction boom. It’s not something <\/span>major<\/span> builders would condone, but it’s usually the result of the immense pressure <\/span>put<\/span> on subcontractors to complete work quickly, which causes errors and shortcuts. If an inspector doesn’t catch them before they are covered up, it could be problematic, especially if a smaller local builder did the work without the extensive raft of warranties offered by national builders. <\/span><\/p>\n\n\n\n

Amid a housing boom like the one that happened before 2008, many investors choose to buy newly constructed homes at a pre-construction price, hoping to either sell them once completed or buy several from developers with highly incentivized “low down payment”-<\/span>type<\/span> deals (many builders own their own mortgage companies and can be creative with the financing) and scale their rental portfolio quickly. <\/span>This<\/span> is a tricky move.<\/span><\/p>\n\n\n\n

Usually, new construction housing is sold at the top of the market, regardless of the down payment. <\/span>They<\/span> are like buying a new car: You pay a premium because they are new, only to see them cede value as other new houses spring up nearby. It\u2019s hard for appraisers to compare new constructions to homes <\/span>being lived<\/span> in.<\/span><\/p>\n\n\n\n

If you buy a new home with an ARM to fuel cash flow, once the rate resets, you could be in big trouble, which happened in 2008 and has already occurred in the commercial market. If you plan to buy a new home for cash flow, make sure it’s profitable on a long-term basis and the sales price <\/span>is not inflated<\/span>. Otherwise, a fix-and-flip or <\/span>BRRRR<\/span><\/a> of an older house is a better investment.<\/span><\/p>\n\n\n\n \n

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Don’t pop the champagne just yet, but one major economist just stated that he envisions the federal funds rate dropping to 3.25% once the Federal Reserve’s rate-cutting cycle is over.  […]<\/p>\n","protected":false},"author":613725,"featured_media":177299,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[8],"tags":[],"class_list":["post-177297","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-real-estate-trends"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/177297","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/613725"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=177297"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/177297\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/177299"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=177297"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=177297"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=177297"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}