Real Estate

Homebuilders suddenly see sales jump as renters flee small urban apartments

Key Points
  • In the initial four weeks of the national shutdown, sales of newly built homes began falling precipitously, down 85% from normal spring activity by the fourth week.
  • In the past two weeks, however, the numbers have started to climb, according to John Burns Real Estate Consulting, which tracks hundreds of builders nationwide.
  • "We're still down roughly 65%, but more positive news is coming out of the new home market, particularly for builders," said Devyn Bachman, manager of research at JBRC.
Contractors construct a wood deck while working on a home under construction in the Norton Commons subdivision in Louisville, Kentucky, on Monday, March 23, 2020.
Luke Sharrett | Bloomberg | Getty Images

Home sales nearly ground to a halt at the end of March, as the coronavirus pandemic forced an economic shutdown that scuttled open houses and shattered consumer confidence. Now, demand appears to be coming back, especially for newly built homes.

In the initial four weeks of the national shutdown, sales of newly built homes began falling precipitously, down 85% from normal spring activity by the fourth week. In the past two weeks, however, the numbers have started to climb, according to John Burns Real Estate Consulting, which tracks hundreds of builders nationwide.

"We're still down roughly 65%, but more positive news is coming out of the new home market, particularly for builders who are targeting the first time and entry level buyers," said Devyn Bachman, manager of research at JBRC. She noted that a wave of renters are leaving their apartments and eyeing new homes.

In her research, Bachman found demand for new construction heavily skewed toward renters, especially young couples with two incomes who feel secure in their employment.

"Just this week we have experienced an increase in sales, as well as continued website engagement activity," said Stephen Paul, executive vice president at Mid-Atlantic Builders, a small company that has communities in Maryland and Northern Virginia.

He said all three of those sales were for speculative homes built without a buyer that were either completed or under construction for a quicker delivery. He added that his company rarely builds on speculation, "however I think buyers would rather just walk through a new home and buy it."

Paul said that Mid-Atlantic is now starting to plan more speculative homes.

Zillow, the nation's largest real estate listing site, reported last week a slight increase in overall search traffic after volume had dropped dramatically. Redfin, a real estate brokerage, also reported an increase potential buyer inquiries to agents.

While the overall numbers are still very low, the builders may recover first for several reasons, not the least of which is they appeal to the newly germophobic. 

"It's safe, it's clean, it's new, and it's easy to show at this point," said Bachman. "Lots of the builders have set up virtual tours on their websites, the sales agents are setting appointments for consumers to come in and tour models in a safe distance manner. They're actually able to show the new home, where in several markets it's very difficult to see resale listings at this point."

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There is also far more supply of newly built homes for sale, twice the supply of existing homes at this point. The existing market was already in a shortage before the pandemic hit. This spring, when listings usually surge, sellers pulled their homes from the market, not wanting buyers coming through but also concerned that values would drop.

Builders can also add incentives more easily, like specific amenities and finishings, and some are increasing real estate commissions to drive demand. Most of the big builders also have in-house mortgage services, making the process much easier for buyers already dealing with the difficulties of social distancing.

"I do think consumers are hungry for a deal, especially the first-time buyers," said Bachman. "If you're working on a quick move-in or one of the speculative inventory sales, you might be able to get some sort of discount in the new home market at this point, which is very attractive to that group."

Government lockdowns may have long-lasting impacts on not just how but where Americans choose to live. The drive to dense, urban areas by the millennial generation may reverse course, especially as some worry about second shelter-in-place orders after the economy reopens.

Staying at home is hard enough, but the smaller the home, the harder that is. Urban apartment dwellers often don't have the luxuries of separate home offices, basements for exercise equipment, or back yards for private outdoor time.

As more companies become more comfortable with their employees working from home, attitudes toward longer commutes may also change — not to mention that gas prices are currently extremely low. Some workers may soon be able to come to the office one or two times a week, and some not at all.

Millennials, the sharing generation, have been more apt to use public transportation, and they look for walkable neighborhoods with retail and restaurants nearby. As builders develop these types of neighborhoods even farther from urban cores, more millennials are likely to come.