2020 has thus far been a year marked by uncertainty. The pandemic has hit nearly every sector hard. Real estate has been moving at a frenetic pace, but with a dearth of sellers. Oodles of buyers on the hunt for new quarantine friendly spaces, combined with record breaking low interest rates have combined to create a severe imbalance in the market. Not enough homes relative to the number of buyers. This means opportunity for new residential home builders.
Every month the National Association of Homebuilders (NAHB) / Wells Fargo surveys members. The survey is intended to be a gauge of the single family housing market. Respondents are asked to rate market conditions for the sale of new homes currently and in the next six months, as well as the traffic of prospective buyers of new homes. (source: nahb.org)
Housing Market Index: (Confidence Index)
A quick comparison of year over year confidence:
September 2019 had a confidence index of 68 as compared to the same month in 2020 an 83! In the middle of the spring, at the height of lockdowns and pandemic fears, note the rock bottom scores in April and May of 30 and 37 respectively. The current confidence score index of 83 is actually the highest in the 35 year history of the survey.
The Mortgage Banker’s Association (MBA) backs up these numbers. They are currently reporting applications for new home purchases up 33.3% over a year ago.
“The housing market continued to exceed expectations in August, as housing demand for new homes stayed strong and the job market continued to recover,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting.
Added Kan, “The new home market has maintained its path of recovery throughout the summer, and record-low mortgage rates and households seeking more space will likely continue to drive demand into the fall.” (source: mba.org)
Part of the reason homebuilding confidence is up is a result of the throngs of people relocating. Seeking more space – whether for working or schooling from home, the trend toward downsizing has turned abruptly. People want bigger homes, and building is a great option for creating the exact spaces desired.
“The suburban shift for home building is keeping builders busy, supported on the demand side by low interest rates,” said NAHB Chief Economist Robert Dietz. “In another sign of this growing trend, builders in other parts of the country have reported receiving calls from customers in high-density markets asking about relocating.”
This building boom is helping the economy. New construction means materials production and jobs. Mortgage bankers, product manufacturers and skilled laborers all should benefit from the high demand. This is great news. The not so great news is there are a few issues constraining the boon and driving up prices for consumers.
Clearly the Covid-19 pandemic has not helped anything related to the economy. Product manufacturers barely surviving during the pandemic shut down production of materials and laid off workers. Now, they are struggling to meet the extremely sharp uptick in demand for their products. The crunch to produce quickly is made even more difficult with social distancing requirements in factories. Additionally, builders are struggling to find finished building lots. In April, with confidence down around 30, manufacturers slowed everything way down, and builders stalled on acquiring lots. Nobody anticipated the demand right around the corner.
Now that demand is in high gear, everybody is scrambling to pick up the pace. A shortage of building materials was already an issue by the end of the summer. On top of Covid and the weak demand in the spring leading to a slowdown, another crisis has added insult to injury:
Every new home requires lumber, and lots of it. The largest lumber manufacturer in the U.S., Weyerhaeuser, is based in Oregon. With over 2.9 million acres in Washington and Oregon, unfortunately, the fires have reached their timberlands. According to a company release, “Several of the fires have reached the company’s timberlands, but it is too soon to assess the affected acreage or potential business impact.” What we do know is that the production shortage from Covid, even before the wildfires has already led to a rise in lumber prices. The NAHB says lumber prices have increased 170% since April, which adds $16,000 to the price of a new single family home. Who knows what will happen to prices if the fires continue to destroy the timberlands out west.
In a typical market, for the exact same home, buyers will pay about 15% more for a new home versus a resale. It will be interesting to see if the spread becomes larger today with all of the competing forces at work. New homes will become more expensive because of the shortage of lumber, skilled trades and other materials. However, at some point, will buyers refuse to pay an increasingly large premium for “new?” Or, will resale prices tack to the new homebuilding price increase? Either way, it looks like prices will continue to rise.
Despite the chaos of 2020, it is great to see the strong demand in this sector. Even with some big challenges, the high demand is creating lots of opportunity and jobs, which is great news for those who had previously been laid off. Let’s hope this current building boom continues to be a boon to the economy.