Custom Home Construction Steady as Overall Market Expands

The onset of the housing crisis and the Great Recession interrupted a 15-year long increasing trend toward a growing share for spec home building. As housing production slowed in 2006 and 2007, the share of non-spec building, particularly custom home building, increased. This not-for sale single-family housing construction is classified in Census housing starts data as either owner- or contractor-built.

The share increased because the credit crunch made it more difficult for builders to obtain AD&C credit and more difficult for buyers to obtain mortgage financing due to falling prices. Thus, the market share of custom home building rose because such construction does not require a sale of real estate from a builder to a homebuyer.

And while housing starts have increased in the last year, the share of single-family owner- and contractor-built housing remains elevated. However, that share is declining slowly as spec home building comes back in markets where homebuyer demand is growing again.

For the third quarter of 2012, Census data indicate that the number of owner- or contractor-built housing starts was virtually unchanged at 37,000, placing the 1-year moving average of the share of  total single-family starts at 26%.  This is down somewhat from the cycle high share of 31.5% set during the second quarter of 2009, with recent declines in market share driven by the overall increase in housing starts.

Nonetheless, these data illustrate that custom home building played an important role during the depths of the Great Recession. While total spec housing starts fell by 85% from the second quarter of 2005 to the final quarter of 2010, the biggest decline experienced by custom home building was a smaller, but still significant, 68%.

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