New homes are in such demand that President Kennedy was in office the last time the supply was this small. The latest figures from the National Association of Home Builders (NAHB) show that August new home starts rose to the highest level in 14 years, up 43% from a year ago. The current construction rate puts the industry on track to produce a million units this year.
New homes represent new supply. Increased supply – inventory – gives buyers more choices and helps hold down prices, not just for new construction but for existing homes as well. If fewer new homes are being built, real estate prices would likely be higher than they are today.
But inventory is hard to find. NAHB reports that new home inventory this August was 40% less than a year ago. The current supply is at the lowest point since 1963, the year when such records were first compiled.
Inventory is not just a problem with new construction. It’s also an issue with existing homes. According to the National Association of Realtors (NAR), unsold existing home inventory in August fell 18.6% from a year ago.
A big reason for the inventory shortage has to do with tenure, how long people remain in one home. In 2018, owners stayed in place an average of 13 years, according to NAR, up three years from 2008. Now – with the COVID-19 pandemic and steep unemployment levels – it’s likely that homes are being kept even longer.
Why is there suddenly so much interest in new homes? Is it just inventory and tenure or are other trends at work? And when will the situation improve? Bankrate spoke with Robert Dietz, senior vice president and chief economist with the National Association of Home Builders to get some answers.
Bankrate: Why have new home sales increased so much? Is there a change in public preferences? A shortage of existing homes? Both?
Dietz: Low interest rates have strengthened demand for for-sale housing. Moreover, we see a suburban shift in housing demand, as buyers are looking for more home(s) in more affordable markets. Combined with very limited resale inventory, these factors are lifting demand for new construction.
Bankrate: The Pew Research Center reports that a majority of 18- to 29-year-olds _ 52% _ now live with their parents. That’s a higher percentage than during the Great Depression. Does this mean we will be seeing more demand for larger homes?
Dietz: Yes, we expect newly built home sizes to rise, after a four- to five-year period of relative decline. People are using their homes for more purposes, including work, study, and exercise. And in some cases, household size is rising. This is a boost for new construction and remodeling.
Bankrate: NAHB reports that August home sales were 43% higher than a year ago while just 3.3 months of inventory were available. Given such strong demand how can homebuilders increase production in the short run?
Dietz: Single-family starts can rise, but there are limits to growth. The two most important limiting factors currently are lumber prices – up about 170% since mid-April – and the ongoing skilled labor shortage. That said we expect single-family construction to post gains in 2021 and 2022.
Bankrate: According to the BLS Job Openings and Labor Turnover Survey (JOLTS), homebuilders had 344,000 job openings in July. Given huge unemployment this year as a result of the COVID-19 pandemic, what can homebuilders do to fill industry job openings and thus expand production?
Dietz: Recruit and train. This is a moment that the industry needs to seize in order to recruit people into construction and train them to lift productivity. In fact, we are forecasting that the residential construction industry will post a year-over-year gain for total employment in the next few months, which would make it very different from most sectors which have job losses.
Lumber prices go through the roof
Bankrate: NAHB reports that lumber price hikes since mid-April have boosted the cost of the average single-family home by more than $16,000. Why have lumber prices increased so dramatically? Is there any price relief in sight?
Dietz: Futures markets are pointing to declining prices as we enter in the market, but still at elevated levels. Prices are high due to reduced domestic lumber production and ongoing tariffs on Canadian softwood lumber.
Bankrate: Mortgage rates as this is written are at or near historic lows. What has happened to affordability as a result of the COVID-19 pandemic during the past year?
Dietz: Housing affordability has certainly received a boost from low interest rates, but declining incomes and elevated unemployment are risk factors.
Bankrate: How have buyer preferences changed; that is, which features do buyers want most these days and which features have become less popular? (Are living rooms gone? Formal dining rooms? What about separate home offices? Charging stations for electric vehicles? Etc.)
Dietz: People want more space, and we are hearing that home offices are a particularly popular feature for homes.
Bankrate: Looking ahead, how is the market for 2021 shaping up in terms of sales and pricing? Predictions?
Dietz: Given high levels of builder confidence and a low supply of inventory, we are expecting gains for single-family construction as interest rates remain low. Home price growth should slow, but we are not forecasting price declines as demand remains solid and the changing geography of housing demand supports more construction.
By Peter G. Miller, Bankrate.com. Visit Bankrate online at www.bankrate.com.