A year like no other boosts the housing market and demand
By Patrick Duffy
About this same time a year ago, I wrote about an aging economic expansion which had begun to slow due both its lengthy duration as well as growing uncertainty with the status quo in global trade, and was partly depending on new home construction to take up the slack. Fast-forward to late 2020, while both the U.S. and the world have experienced a wrenching pandemic unmatched in modern history, that experience has accelerated some key trends in how the world uses real estate, whether in the form of housing or commercial spaces for offices, retail stores, warehouses and hotels.
Perhaps the biggest surprise during the summer and through the fall has been a housing market seemingly on steroids due to record-low mortgage rates and pent-up demand for homes not just in suburbs, but also in resort locations. For many residents able to work remotely, that has meant a preference for larger, newer homes in low-density areas, often at the expense of high-priced apartments, condominiums and townhomes in large cities such as New York, Boston, Seattle and San Francisco. According to a Redfin study, even the demand for second homes was up 100% year-on-year in October, compared with 50% for primary homes. Whether or not this is a short-term response to a frightening virus or a new normal remains to be seen, but with new, effective vaccines now on the horizon, we should be closer to an answer a year from now.
For now, the housing market remains a pandemic success story, with existing home sales in October up 27% year-on-year to the highest level since 2006. With just 2.5 months’ worth of inventory at current sales rates, that has put pressure on the nation’s home builders to ramp up production, who have responded with starting the most homes since the spring of 2007. In addition, according to NAHB’s Housing Trends Report for the third quarter of 2020, the share of buyers interested in a newly built home rose to 31%, up substantially from 18% a year earlier. At the same time, the share indifferent to new or existing homes fell from 41% to 32%.
Whether due to heightened buyer preference for new home technology, more space or suburban living, home builder confidence rose to a record 90 in November, the third consecutive high in the series dating back 35 years. In turn, this overall confidence was boosted by more records for indexes measuring current sales conditions, expectations for the next six months, and current buyer traffic. In September, with year-on-year sales of new single-family homes up 32% to the highest level since late 2006 and pending sales of all new homes up 47%, it’s possible that continued demand from move-up millennials and move-down baby boomers could extend this rally well past the pandemic’s end.
Fortunately, the economic rebound since the spring has been stronger than forecast, owing to the resilience of employers adapting to safety measures, especially in construction, manufacturing, technology and business services. However, customer-facing jobs in retail, restaurants and bars, live events, lodging and travel remain in peril, accounting for a bulk of the 11 million persons still unemployed in October – about double the 5.8 million unemployed during pre-pandemic February. Another 5 million more persons have disappeared from being counted in the labor force since February (usually due to discouraged workers no longer looking for jobs), bringing that total to over 100 million.
To be sure, the promising performance of the announced vaccines will mean a gradual re-opening of the overall economy in 2021, but until then Americans need to get through the next few months, and questions remain on the extensions of extended and enhanced unemployment benefits, a national moratorium on residential evictions, more aid for state and local governments bleeding cash, and support for those businesses forced to severely curtail or shut down entirely in order to protect the health of everyone.
Also unanswered are how to address renters and homeowners owing months of late payments as well as billions of commercial mortgage debt in special servicing, especially for hotel and retail properties. Moreover, given the widespread adoption of online business meetings and remote work as well as increasing interest in online shopping, expect to see new uses for land now reserved for large malls, older office buildings and some hotels catering to business travelers even long after the pandemic has ended. That’s because pandemics often change the course of history, and this one will be no different.
Patrick Duffy is a principal with MetroIntelligence and contributes to BuilderBytes. He can be reached at firstname.lastname@example.org or at 310-666-8288.