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Analysis: New home builders shift focus

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Rising interest rates and construction costs, along with demand for more affordable options, pushed new home builders to shift focus in 2022, according to recent analysis.

Microdata from the Survey of Construction 2022 analyzed by Zillow illustrates a shift from primarily single-family home construction before and during the pandemic to more smaller, taller, modular buildings that cost less to produce.

“They’re responding to the higher interest rate environment … by basically building smaller, less expensive, taller units and they’re leaning into higher density,” Orphe Divounguy, senior economist at Zillow, told The Center Square.

Following double-digit increases for construction of single-family homes in 2020 and 2021, new construction of those homes fell by more than 10% in 2022, the first year of decline since 2011. Detached home construction declined by 12%, while attached single-family homes were up 2.9%.

Builders also focused on homes with less than three bedrooms, with new construction up 9.3% from 2021 to 2022. New starts for those with three bedrooms or more dropped 13.1%, according to the analysis.

Other trends included a 4.9% increase in single-family homes of more than two stories, compared to a 10.8% decline in starts of homes with two stories or fewer, and a median new single-family home size that was 100 square feet smaller than in 2021.

New homes that are constructed off site also increased by 23.9% between 2021 and 2022, while on-site single-family home construction declined by 11.2%. Zillow reports the uptick in off-site activity was likely in response to tight, unpredictable supply chains and rising costs for builders.

“Manufactured homes (are) more efficiently built – less waste, more climate friendly, and they’re essentially cheaper to build,” Divounguy said. “That’s a good thing for homebuyers.”

Baby boomers looking to downsize, first-time homebuyers, and others searching for more affordable options will benefit from the shift, he said.

“They’re basically responding to a demand for more affordable units,” Divounguy said.

Improving affordability in the market more broadly, however, means “builders have to be able to continue building at a rapid pace,” he said, and challenges remain.

“We need to see more zoning reforms to allow this type of missing middle housing,” Divounguy said, particularly in large metro areas with fewer affordable options.

“Unfortunately, it’s those places that have the most restrictive building codes,” he said.

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