Michigan home builders face slowdown. Here’s why

After returning to Metro Detroit from Washington State last year, Ryan Kowalski began to search for a home to buy.

After two months of looking, Kowalski went another route — he chose to build a condo in Hazel Park with an open floor plan and bedrooms with attached bathrooms.

“I was very happy to find this condo because it just checked a lot of the boxes, if not all of them,” he said.

Kowalski, 34, is among Metro Detroiters building homes in a housing market where supply remains tight and prices remain high. His 1,334-square-foot, two-bedroom condo is expected to be complete this summer after nearly a year of construction.

But after a period of high activity in new home construction, Metro Detroit builders are seeing a bit of a slowdown as mortgage rates rise in response to the Federal Reserve Board’s interest-rate hikes aimed at taming inflation that’s running at a four-decade high.

In April, 303 single-family home permits were issued in Macomb, Oakland, Wayne and St. Clair counties, based on residential permit data from the Home Builders Association of Southeastern Michigan and the HBA/Carter Lumber Southeastern Michigan Residential Building Activity Report. That’s down from 414 in March, and lower than the 436 permits issued in April 2021.

“The biggest apparent factor contributing to the slowdown is the significant rise in the baseline 30-year fixed-rate mortgage,” said Forrest M. Wall, CEO of the HBA of Southeastern Michigan.

According to Freddie Mac, the 30-year rate rose to 5.11% in April, an increase from 2.97% in April 2021 and the highest since 5.2% in April 2010, following the Great Recession. Rates continued to rise earlier this month and have since eased a bit, falling to 5.1% this week — still well above the levels of the past several years — but that trend could reverse as the Fed has signaled that more interest-rate hikes are on the way.

While new home construction is expected to continue to slow in the coming months, builders in Michigan say they are still busy with clients as demand outpaces the speed at which they can complete construction. They’re also contending with higher material costs, supply chain issues and labor shortages at times.

Nationally, new single-family home sales have flattened and are expected to decrease by 6% in 2023, said Danushka Nanayakkara-Skillington, assistant vice president with the National Association of Home Builders.

What’s the cause?

“I think definitely the affordability challenges,” she said. “That’s coming from the rising interest rates. … We think the mortgage rate could get up to close to 6% by the end of the year and (there’s) the double-digit increase in the building material costs. Year over year, building material has been up 19%. And the continued rising costs in home prices are going to take a toll on the demand as well.”

Nanayakkara-Skillington said some would-be new construction buyers will wait it out and perhaps rent homes for longer. She notes the construction of multi-family residential is strong nationally, with a half-million units expected this year and next.

“People cannot afford the high mortgage rates coupled along with the price increases,” she said. “If it was one thing, you can maybe stretch the budget. But if the mortgage rates are also increasing, that’s a lot of strain, especially for the first-time homebuyers.”

Kowalski said he locked in the mortgage for his condo, priced in the $290,000s, earlier this year at about 3.7%.

“’I’m glad I chose to lock in when I did …,” he said. “Those rates can be really a little bit intimidating, especially from a first-time homebuyer standpoint. I can see that putting a little bit of a pause.”

Darian Neubecker, chief operating officer of Robertson Brothers Homes, stands in the stairwell of a 2,800-square-foot home under construction in the Villas at Bloomfield Grove in Bloomfield Township on Tuesday, May 24.

Darian Neubecker, chief operating officer of Robertson Brothers Homes, said he’s noticed the impact in sales from rising interest rates. The Bloomfield Hills-based company builds 150-200 homes a year and has new residential projects underway in cities including Bloomfield Hills, Hazel Park and Detroit.

“You know, we have slowed in the last couple of months, and interest rates have not helped,” he said. “But it’s still a solid market. We’re still moving forward, buying additional land and bringing on new projects. Certainly, the last couple of months have been slower with interest rates rising. And I think COVID maybe pulled forward some of the demand.”

Neubecker said business has been strong for the past decade, even amid the pandemic as people spending more time at home wanted to improve their living spaces.

“There was an increased amount of demand from homebuyers, which led into some supply-chain challenges, which we’ve been all working through as an industry for the last couple of years,” he said.

Higher material costs are an additional challenge. Lumber prices dipped in April but remain above pre-pandemic levels. As a result, average permit values increased 17% year-over-year in April, according to the HBA of Southeastern Michigan.

During a recent visit to the Villas at Bloomfield Grove development under construction in Bloomfield Hills, Neubecker noted that the lumber to build one of the homes would have cost $47,000 pre-pandemic. Now it’s up nearly 60% at $75,000.

Masons lay bricks on the front of this house in the Villas at Bloomfield Grove development.

“Lumber was extremely expensive and came back down last fall, and then it spiked again this winter and early spring and now the last month it’s gone back down,” Neubecker said. “I think it will continue to go back down and kind of settle in — maybe not at historic levels, but certainly at a number that’s much more reasonable than it’s been.

“I would like to think that we’re maybe in the seventh inning of the supply chain challenges and maybe hopefully by the late summer, early fall, we’ve worked our way through the supply chain issues as best we can.”

Not only is it costing more to build homes, it’s taking longer too because of labor and material shortages. A home that may have taken four months in the past to build takes six months, while a home that typically takes nine months to build now takes a full year, Neubecker said.

Dominic F. Moceri of Moceri Companies said most home builds are taking an additional two to three months to complete. The Auburn Hills-based company builds subdivisions and on individual lots at owner request in communities including Clinton Township, Auburn Hills and Bloomfield Hills.

“Delivery times are taking longer, but we just push our clients to make selections and order materials far enough out in advance to really scale back that lag time that it takes to complete a home,” he said. “We haven’t really noticed anything crazy. We’re just really focusing on ordering accordingly.”

Victor Yee of Rochester Hills recently moved into his new ranch-style, 1,850-square-foot detached condominium, downsizing from a 3,100-square-foot, three-story house in Troy. Yee, 74, said his home in Troy took 10 months to build in the late 1990s. His new home took a year for his builder, Robertson Brothers Homes, to complete.

“They were quite frank about the supply chain issues and lack of full labor crews at certain times and such,” Yee said. “The building superintendent and the sales associate, they were quite accurate in their comments to us about time frame and so forth.”

Yee said building a home, particularly in this low-inventory market, took the competition out of the equation. 

“When you’re building, it’s not like competing for the same home,” he said. “You’re doing your own thing. You’re not trying to fight with 20 people to buy a single home and you’re not making offers and bidding. Pretty much you decide what you want and it’s priced accordingly.”

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Twitter: @CWilliams_DN