Are Builders Overbuilding Again? Let’s Look at the Facts.

If it feels like you’re seeing new construction signs pop up everywhere, you’re not wrong. Builders have been busy. And it has left some people wondering: Are we overbuilding, as we did right before the 2008 housing crash?

No matter what you may hear in the news, there’s no reason for alarm. In reality, data shows builders aren’t racing ahead; they’re actually starting to tap the brakes.

Builders Are Pulling Back, Not Piling On

Permits (applications to start building new homes) are one of the best early indicators for what’s next for home construction. Currently, building permits are trending downward, not upward. Here’s why that’s so important.

In the years leading up to the 2008 housing crash, builders significantly increased their production of single-family homes (indicated by the red arrow in the graph below). Unfortunately, they built far more homes than the market actually required. That oversupply led to falling home prices. That’s what so many people remember, and what they worry will happen again.

But while construction has been picking back up since roughly 2012, we’re not headed for a repeat of the same mistakes. The latest data available shows builders are actually starting construction on fewer homes right now (the green arrow in the graph below):

New data from the National Association of Home Builders (NAHB) confirms that trend. It shows that single-family building permits have fallen for eight straight months.

The Slowdown Isn’t Random, It’s Intentional

Essentially, builders are monitoring and responding to today’s economic conditions and buyer demand in real-time. And they’re pumping the brakes on their pipelines to avoid getting caught with too much unsold inventory. As Ali Wolf, Chief Economist at Zonda, says:

“. . . builders are still working through their backlog of inventory but are more cautious with new starts.”

That’s a big contrast to what happened before the housing crash, when overconfidence led to record-breaking levels of new home construction – even as demand was dropping. Today’s builders aren’t overconfident. They’re listening to the market and adjusting before things get out of balance.

The Regional Picture Tells the Same Story

And while inventory is going to vary a lot based on where you live, if you zoom out and look at regional data, the pattern holds almost everywhere (see graph below):

NAHB reports that single-family permits are down in nearly every part of the country, with only one region showing a slight increase. And even there, the growth is so small, it’s practically flat.

Why This Isn’t 2008 All Over Again

In the lead-up to the crash, builders continued to build long after demand had disappeared. This time, they’re slowing down early, and that’s a good thing.

The market actually needs more homes after years of underbuilding. However, builders are ensuring they don’t have to overcorrect. They’re being intentional about how many homes they’re building right now.

So yes, you’re seeing more new homes for sale today, but that doesn’t mean we’re oversupplied nationally. It means buyers finally have more options, and builders are pacing themselves to keep things in check. They won’t flood the market. And that’s a particularly beneficial development for housing overall.

Bottom Line

Seeing more new homes for sale doesn’t mean builders are overdoing it. Since building permits have been declining for eight straight months, it’s clear this isn’t an out-of-control boom. It’s a measured recovery.

If you’d like to learn more about what builders are doing in our area, let’s connect.