Chief Economist Dr. Rob Dietz with the National Association of Home Builders spoke to delegates about the state of the housing market during Fall Leadership Meetings in Houston, Texas earlier this month. He cited ongoing supply chain challenges and housing affordability as two of the biggest challenges facing the new home building industry. Government regulations, material and labor price increases and supply chain issues combine with rising land prices and the cost to develop to create the perfect storm – housing affordability is at a 10 year low. Dietz states, “It is a frustrating market for first time buyers, we have priced out a lot of them due to higher prices due to strong demand. If you are a homeowner you have acquired wealth and those prices haven’t affected you in the same way.”
On a good note, economic growth is picking up, in fact we see the strongest growth since 1994. Of course, it’s a bit of a cheat because the economy has been artificially stimulated by multiple government programs. The Delta Covid wave is waning and we are going to see 5.9% growth in GDP in 2021. We experienced a V-shaped recovery following Covid and we have growth in all three legs of the construction industry (single family, remodeling and multifamily). Dietz comments, “There was a reversal of the construction pipeline this summer. For the first time since 2013, there are now more single-family units under construction than multifamily units.”
Of course there are bumps in the road. The biggest one being that there is a risk of housing affordability going down from here. Inflation is elevated. Is it higher than what the gov is reporting? Dietz says no. The core personal consumption expenditures price index, which excludes food and energy costs and is the Federal Reserve’s preferred measure of inflation, increased 0.3% for the month and is up 3.6% from a year ago. Dietz states that the Fed has done an outstanding job this cycle. Dietz goes on to say he thinks inflation is going to ease a bit, and to expect 2.7% on average for 2022 and 2023. This is a little higher than what the Fed Reserve forecasts as we see some supply-chain issues persisting.”
Other areas to keep an eye on. Rents are going to be a slow lagging contributor to inflation and housing will be a lagging growth contributor. Dietz comments,” This presents a messaging challenge. We don’t want to sound an alarm on inflation that produces higher interest rates and monetary policy, but we have to work with the commerce department and White House to help with supply chain issues.”
As we have all seen recently, interest rates are rising. The 30 fixed rate is heading to 4% in 2023.
There is a lot of demand for building materials. In the auto industry, light trucks are gobbling market share, but market share for cars is dropping. This is due to the computer chip shortage causing a shortage of cars available for sale. Residential construction material costs have increased as well, with price growth peaking at 24% growth, it is going to start to come down in terms of year-over-year gains.
Some supply chain problems are going to continue into 2023. Container ships can’t be unloaded quickly enough and the blockages are going to continue for a while. At its peak lumber increased by $30,000 per single family home and by $10,000 per apartment — this is a huge price impact. Domestic sawmill output is trending higher, but not producing enough. We produced more lumber in 2018 in the U.S. than 2020! The mills are very cautious. The U.S. is importing less lumber from Canada. At this point we need a new softwood lumber agreement. Steel prices are soaring along with copper, aluminum and gypsum.
As we work through the supply chain issues, labor is going to emerge as an even bigger problem. Especially as we head toward 2023. The labor shortage will emerge as the top issue for home builders.
State of the Housing Market
- Single family starts in 2022 are likely to be flat YOY, but that is up more than 20% over 2019.
- Only 57% of homes are affordable for people in the mid-range of household incomes.
- Single family build-to-rent is only 5% of the market but rising, especially in places like Atlanta.
- The average age of a home in the U.S. is 41 now. Remodelers have raised prices a lot. Some demand for home improvement is being priced out of the market right now, according to surveys (half of remodelers who have raised prices report a decline in unmet demand),
- Entry level is 30% of new construction, but these buyers are very sensitive to changes in interest rates.
As an industry we need to continue to focus on building homes that are affordable, solving issues connected to material shortages and the labor crisis. The housing market is strong and we have a lot of unmet need for housing in the U.S.
For local Atlanta forecasts related to the housing market read more from MarketNsight on this site.