What a Construction Boom Means for U.S. Real Estate

Could a construction boom be on the way for 2025? Some experts seem to think so. Our friends at Bigger Pockets are also discussing the possibility – foreseeing the lower rates will kickstart construction activity – if not in 2025, certainly within the next five years.

But what does a potential construction boom mean for the U.S. real estate market? And more specifically, what does it mean for real estate investors? Here’s the breakdown.

Recap: The State of Housing Inventory

Before we discuss the consequences of a construction surge, we need to refresh ourselves on the current state of the market and how we got here. Here’s what we know:

• Housing inventory has been woefully behind since the Great Recession (2008).
• As the market recovered, the inventory glut disappeared as builders remained cautious.
• When the 2020 pandemic hit, it exacerbated issues already plaguing the market. Demand surged, only heightening the effects of tight inventory.
• Supply chain disruptions and shutdowns prevented builders from adequately responding to this renewed demand. In addition, many potential sellers kept themselves off the market.
• Property prices surged with low interest rates and high demand.
• The Fed stepped in to increase interest rates to control inflation.
• The housing market demonstrated a limited response because inventory was just that behind.

Now, there’s plenty of nuance we could go into. But for our purposes, this is where we are. The post-pandemic market presents challenges and opportunities for homebuyers and investors alike – but we must prepare for how circumstances may change.

And one of those likely scenarios is a significant housing inventory catch-up.

6 Consequences of a Housing Inventory Boom

#1 – Increased Supply

Lower Property Prices: How prices react to increased inventory largely depends on how demand changes. If it doesn’t rise at the same pace, this can lead to an oversupply, potentially causing property prices to stagnate or even decrease. However, we’re more likely to see price correction and stabilization in this climate.

Pressure on Existing Homes: The influx of modern, energy-efficient homes can make older properties less attractive. As a result, sellers of existing homes may have to lower prices or invest in renovations to remain competitive. Investors may be able to capitalize on these properties!

#2 – Impact on Rent Prices

Potential Decrease in Rents: A surplus of new rental units could lead to lower rents, particularly if the new construction targets rental properties or multifamily units. This isn’t necessarily bad for investors, as it can make residents more stable in the long term.

Area-Specific Variations: Impact on home prices, including rents, will vary by area. Individual market inventory will make the difference. A construction boom doesn’t mean we’ll see an inventory surge everywhere, so be mindful of your specific markets.

#3 – Shift in Investor Dynamics

Increased Competition: With more housing available, investors may have to compete more for residents. We must be on our A-game, providing quality properties and incentives to rent long-term.

Pressure on Profit Margins: Investors who bought properties at higher prices before the increase in construction may face pressure on profit margins. Be mindful of changes in dynamics over the next few years, and don’t overpay!

#4 – Market Stabilization

Potential for Market Cooling: In markets experiencing rapid price increases due to high demand and low supply, increased construction stabilizes the market. A balanced supply-demand dynamic leads to sustainable price growth and prevents housing bubbles.

Curbing Speculative Buying: Scarcity drives speculative buying, which can be risky for investors and the market at large. New construction can reduce such speculative behavior as more housing becomes available.

#5 – Economic Growth and Job Creation

Boost to the Local Economy: New construction projects create jobs and stimulate local economies. As long-term stability emerges, this economic activity signals a market worthy of investor attention.

Neighborhood Development: New housing developments often lead to the growth of amenities and infrastructure such as schools, retail, and transportation. This enhances the desirability of specific areas.

#6 – Possible Market Volatility

Short-Term Oversupply: If construction increases dramatically, especially in a short period, it may lead to temporary oversupply. The adjustment of supply and demand might result in short-term volatility.

Long-Term Adjustments: Over time, of course, the market absorbs new supply as population growth, urbanization, or other drivers of demand catch up. In such cases, short-term volatility often gives way to long-term stability.

Market conditions are constantly in flux. Should inventory increase, there will be different challenges – and opportunities – for investors to address. Change isn’t good or bad. Change is change. What matters is that investors prepare themselves to pivot their strategies accordingly!

Ready to invest but worried about risk? Let your REI Nation advisor help!