New Homes: Housing a Bright Spot, Affordability a Concern
NAHB 2021 forecast: Expect strong demand and sales – but regulatory and supply-side cost challenges could slow momentum, limit growth and hurt affordable housing.
WASHINGTON – According to economists speaking at the 2021 virtual International Builders’ Show, housing has been a bright spot in the economic recovery as the country rebounds from the COVID-10 pandemic, and the home building industry is “poised for another solid year in 2021.”
However, increased costs due to supply-side issues, such as the rising cost of lumber, and regulatory issues have increased the cost of new homes. The economists agreed that the rising costs could “harm housing affordability, slowing momentum and limiting growth.”
“Housing affordability will continue to be a top concern this year,” says NAHB Chief Economist Robert Dietz. “On the demand side of the housing market, limited inventories of single-family homes generated strong price gains in 2020. While supply-side pressures, such as resurgent lumber prices, a shortage of buildable lots, inconsistent access to building materials and a regional skilled labor deficit foreshadow higher costs and longer build times this year.”
Dietz says “a changing regulatory landscape” also threatens to erode housing affordability and make it more difficult to help buyers by easing the tight inventory of homes for sale.
Housing is one of the few U.S. sectors with year-over-year job gains. But NAHB says that even with the increased number of construction workers recently hired, the industry still doesn’t have enough labor to meet the increasing demand for housing. While historically low interest rates drive some of the current demand, a geographic shift in where people choose to live has also had an impact as the popularity of lower-density areas grows.
The biggest short-term challenge facing builders? Dietz says, “It is undoubtedly lumber prices. Pricing is now near the peak of mid-September and easily adding at least $16,000 to the cost of building a typical new single-family home.”
Milestone for single-family starts
Single-family starts posted a 2020 total of just under 1 million – 11% over the 2019 level. The NAHB forecast is for ongoing gains for single-family construction in 2021, though at a slower growth rate than in 2020. Production is expected to rise an additional 5% to 1.03 million this year – the first year that total annual single-family production has exceeded 1 million since the Great Recession.
The multifamily construction market will experience weakness as rent growth slows and vacancy rates rise. However, the development market should stabilize by 2022. Multifamily starts are expected to fall 11% in 2020 when final numbers are released, to 349,000 units, but post a 5% 2021 gain to 365,000 units.
Remodeling will remain strong as people continue to upgrade existing homes for more purposes, such as home offices, home gyms and in-law units. Residential remodeling is expected to register a 4% gain in 2021.
Supply and demand
David Berson, senior vice president and chief economist at Nationwide Mutual Insurance Company, said that millennials are key to household growth and housing demand. “The demographics look good, particularly for the 25-to-40 age group,” he says. But there’s a dearth of new and existing homes for sale.
“The number of existing homes for sale has never been lower,” says Berson. “Why? The pandemic.”
The existing inventory currently stands at a record-low 1.9-months’ supply. Historically, six months of supply is associated with a balanced market. For new homes, inventory is currently at a low 4.3-months’ supply, with 302,000 new single-family homes for sale – 18.9% lower than December 2019.
With the inventory of total homes for sale at record lows, solid demand coupled with lack of inventory is producing strong price gains that could approach 10% this year.
Two regions stand out
Delving beneath national numbers, the South and West will lead new-home growth in the year ahead, according to Frank Nothaft, senior vice president and chief economist at CoreLogic.
“Homes being built are following population flows,” Nothaft says, noting that metros with affordable homes, high employment and outdoor amenities have had the highest growth in new-home sales over the last year.
New-home demand is greatest in Texas and Florida, which accounted for more than half the nation’s population growth last year. Arizona and North Carolina also posted large population gains.
From Oct. 2019 to Sept. 2020, the South posted the largest number of new home sales in the nation, led by Dallas, Houston, Atlanta, Phoenix and Austin, Texas.
“Dallas-Fort Worth had more new-home closings in the last year than the entire state of California for single-family homes,” says Nothaft.
Growing home equity also bodes well for the remodeling sector. Nothaft says remodeling expenditures are expected to rise 3.7% this year to $352 billion.
A shift to single-family rental
All the economists agreed that tenants are shifting their preference from multifamily rental to single-family rental.
“Single-family rents are up 3.5% over the last year, while rents on multifamily rental apartments are down 3%,” says Nothaft.
“There are a lot of people who prefer to live in a single-family home rather than an apartment,” adds Berson. “With the pandemic, that only accentuates that demand.”
“My expectation is that the single-family, built-for-rent construction market share, which is currently around 4.5%, will likely grow to 5-6% over the next two to three years,” says Dietz.
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