Higher construction costs force new home buyers to seek larger loans

Higher building costs pushed the average size for a mortgage on a newly constructed home to an all-time high, but also contributed to a slowdown in purchases in December, the Mortgage Bankers Association said.

Compared with November, mortgage application volume for a new home purchase fell 5%, while on a year-over-year basis, it fell by 7.1%, the MBA's Builder Application Survey found. The data is not seasonally adjusted.

Meanwhile, the average loan size increased in December to $423,102, from $414,114 in November and $367,502 for December 2020.

"Applications to buy a new home slowed in December, while the activity remained tilted to higher-priced homes," said Joel Kan, associate vice president of economic and Industry Forecasting. “Supply chain challenges, labor shortages, and higher materials costs also contributed to last month's decline, as projects were delayed or cost more to complete."

The increases in construction costs are being passed on to consumers through a higher sales price, Kan added.

Lumber price volatility is at a 75-year high, a recent National Association of Home Builders report stated.

By product type, conventional loans made up 77.2% of December's new home mortgage applications. Borrowers seeking Federal Housing Administration-insured loans made up 12.6% of the month's volume; Veterans Affairs-guaranteed mortgages, 9.8%; and the U.S. Department of Agriculture/Rural Housing Service program made up 0.4%.

New single-family home sales were running at a seasonally adjusted annual rate of 887,000 units in December, the MBA estimated based on builder survey application data. That is a 2% decrease from the November pace of 905,000 units. A separate federal government report for November found new home sales that month were at a seven-month high.

Single-family housing starts dropped 2.3% in December versus November, the Census Bureau said. But building permits for single-family homes increased by 2% in that time frame. Single‐family housing completions in December were at a 990,000 seasonally adjusted unit rate; this is 3.9% above November's revised rate of 953,000.

"Wednesday's report on housing starts revealed that there are almost 770,000 homes under construction," MBA Chief Economist Mike Fratantoni said in a commentary on December's existing home sales data released on Jan. 20. "This new supply is clearly needed, as move-up buyers purchasing new homes will free up existing inventory for the wave of first-time buyers."

On an unadjusted basis, the MBA estimated new home sales totaled 60,000 in December, down 7.7% from 65,000 in November.