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Slowing but Continuing Growth in New Homes Market Forecast for 2021

Millionacres logo Millionacres 12/3/2020 Marc Rapport
a man standing in front of a building: Slowing but Continuing Growth in New Homes Market Forecast for 2021 © Provided by Millionacres Slowing but Continuing Growth in New Homes Market Forecast for 2021

The coming year should see a continuation of the growth in new construction starts and sales in residential markets across the country -- pandemic permitting. Whether 2021 matches 2020's performance remains to be seen, of course. Demand this year was driven by low interest rates, an interest in more space inside and out (spurned in part by the work-from-home trend) that's driving a shift to the suburbs, and a shortage of existing inventory, especially for moderately priced single-family homes.

The result was dramatic. New construction starts in October hit the highest levels since 2007, just before the Great Recession.

The seasonally adjusted annual rate for privately owned, single-family housing starts was up 20.6% year to date in October 2020 from October 2019, according to a November report from the U.S. Census Bureau and Department of Housing and Urban Development (HUD). For housing starts with two to four units, it was up 25%. (Multifamily projects of five or more units were actually off 30.6% year over year.)

Home sales and sentiment also on the rise

Sales of newly built homes also are surging, with October's rate of new single-family houses up a blazing 41.5% from October 2019, HUD and the Census Bureau report. The median sales price reached $330,600, with an inventory supply of 3.3 months available to a market that seems to continue to be eager to buy.

The market for existing homes, of course, dwarfs new construction. It too had quite a year, with the National Association of Realtors (NAR) reporting sales up 26.6% in October 2020 compared with the year-ago month. The NAR predicts existing home sales will rise by 10% in 2021.

The construction community itself seems to share the positive sentiment, with builder confidence in the market for newly built, single-family homes hitting a record high in a housing market index kept by the National Association of Home Builders (NAHB).

So, what's ahead for 2021? More growth, albeit not as dramatic as 2020, would seem to be a safe bet. The September HUD/Census sales report already had, in fact, detected a slowdown from September to October.

Modest gains seen for next year

Ed Zarenski, a longtime construction economics analyst and cost estimator, expects residential starts to grow 5% in 2021. Zarenski, who draws on info from Dodge Data & Analytics for his forecast, says:

Spending has been above expectations now for several months. Spending will moderate with slight increases and decreases but overall will increase up to 6% in 2021. Demand for new homes will remain high.

Robert Dietz, senior economist at the NAHB, also expects modest gains for single-family construction and single-family new home sales. Plus, he says sales growth will need to slow somewhat to allow construction to catch up.

"The gap between sales and starts is at a historic margin," Dietz says, adding:

Multifamily construction will decline in 2021 before stabilizing in 2022, although apartment construction will see strength in lower-density markets. Remodeling will remain strong…. Tailwinds for continuing strength in the new-home business include low mortgage interest rates, favorable demographics, and a suburban shift for housing preferences. Upside surprises could include a faster-than-expected deployment of vaccines and antivirals.

Again, the pandemic.

Meanwhile, the NAHB prognosticator says, "Wild cards in the forecast on the downside also include large changes in interest rates (although he expects them to remain near their historic lows at below 4%) and significantly tighter regulatory policy."

That would add to possible weaknesses in construction due to rising costs for building materials and land, as well as indirect costs of longer delivery times for those materials. "We also see higher regulatory risks for government policies in the areas of labor and land development," Dietz says.

Location, location, location

Data scientist Francesca Ortegren with the Clever real estate listing service says she, too, expects new construction to continue rising in 2021, and geography has a lot to do with it.

Ortegren says: "We're likely to see more construction in areas that continue to have quick sales, limited inventory, and high prices. According to our Buyer Demand Report, midsized metro areas seemed to have the largest increase in demand (as it related to supply) throughout the beginning half of the pandemic."

She pointed to areas such as Harrisburg, Pennsylvania.; Albany, New York; Rochester, New York; and New Orleans as examples of significant increases in demand compared to inventory. "We can expect prospective homeowners in those areas to turn to building to avoid the seller's market," Ortegren says.

As for the pandemic, the Clever data diver says: "I anticipate demand will remain high even after lockdowns lift more permanently. Instead, we might see changes in inventory such that more homes are listed for sale as people regain jobs and the economy grows." People whose personal economies don't recover and are forced to sell after forbearances expire also could add to inventory.

But don't count on a buyer's market emerging, since inventory was low before the pandemic and the ensuing buying surge. A large jump in construction would be needed to even up those market forces, much less swing the market to the other side of the supply-demand pendulum.

The Millionacres bottom line

A shortage of existing housing, low interest rates, and a consumer shift to prefer more space in and around their homes should all combine to help drive demand for new homes to be built and bought in the year ahead.

That probably won't happen at the breakneck space seen in the latter half of 2020 as the housing market, like the stock market, sprung back from their swoons as COVID-19 first forced much of the economy, and everything else in America, to shut down.

Growth will be more modest as vaccines are administered by the hundreds of millions, allowing life to return to some kind of normal, because again, it all depends on the coronavirus.

As Zarenski says, "Any significant change in the trajectory of pandemic response could dramatically change the forecast for new work." And everything else.

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