2021 in Review: Housing Market

Despite Higher Inflation and Supply Chain Challenges, the Housing Market Endured.

By Patrick Duffy

About this same time a year ago, I wrote about an economy still in the midst of a once-in-a-lifetime pandemic, but eager to gradually re-start its engines with the roll-out of several highly successful vaccines.

Since then, residential real estate has not only held up surprisingly well, but benefitted from a newfound interest in new, larger homes for both sale and rent in suburbs and small cities throughout the country. At the same time, asset classes including equities, commodities and crypto currencies, with a few corrections, have continued on upward trajectories which show few signs of ebbing.

However, both the country and the world have faced considerable kinks in supply chain flows in order to meet the heightened demand for more goods than services from homebound customers, but that is slowly improving.

While some opportunists are blaming this on politics, this situation really has more to do with a ‘just-in-time’ inventory system for non-digital products which was carefully calibrated to maximize profits, but had no adequate back-up system in place to address its vulnerabilities.

Add in a shipping industry split mostly among multiple private companies plus major ports run by local jurisdictions, and the result was angry shoppers, frustrated retailers, exasperated wholesalers, and shippers racking up record profits, all of which combined have led to the highest inflation rate in three decades.

The Federal Reserve and several of the largest Wall Street institutions continue to maintain that this heightened inflation is transitory, and will ebb sometime in the middle of 2022 as supply chains return to normal.

That doesn’t help today’s real estate developers and home builders, who according to the Producer Price Index for October faced a 12.3 percent increase in overall construction costs between October 2020 and now. Still, because the perception of future inflation is largely psychological guesswork, the Fed is also mindful of prematurely slowing down economic growth with hiking interest rates too soon.

“For the housing market, the bull market is showing no signs of stopping, but there are some signs of it gradually retreating to a less frenzied pace.”

The other big story for 2021 was “The Great Resignation,” in which historically high numbers of workers quit their jobs in search of better opportunities, especially in low-paying, consumer-facing positions in retail, trade, leisure and hospitality.

While many pundits suggested that it was enhanced unemployment benefits and other stimulus measures keeping couch potatoes happy at home, revised statistics from the Bureau of Labor Statistics showed an additional 626,000 new jobs filled over the summer as employers scrambling to fill positions were often late in responding to surveys.

While it is certainly true that many employers are reporting difficulties in retaining and hiring talent, workers would argue that they’re simply switching jobs and careers for better pay, benefits and flexibility.

For the housing market, the bull market is showing no signs of stopping, but there are some signs of it gradually retreating to a less frenzied pace. In an acknowledgement of higher home prices resulting from lower interest rates and increased demand, FannieMae and FreddieMac are expected to increase their loan limits on conforming loans to $650,000 in most cities and to nearly $1 million in high-cost markets, which should ease bottlenecks on getting some mortgage loans funded.

While some economists would argue that this higher level of government backing comes with added risks to taxpayers, given an estimated shortage by Realtor.com of over five million homes for sale nationwide, allowing more buyers access to mortgage financing is certainly one way to address supply/demand imbalances.

Despite builders facing ongoing challenges with supply chains, available labor and buildable lots, their confidence on NAHB’s Housing Market Index (HMI) rebounded to 83 in November, matching levels last noted in the spring. Confidence in their multi-family sector indices also improved during the third quarter of 2021, with the production index rising to 53 (thus indicating improving conditions) and the occupancy index increasing to 75, a new record dating back to its inception in 2003.

Finally, despite a less-than-ideal national vaccination rate in the United States to curb transmissions and mutations of COVID-19, the addition of new treatments in the form of pills should eventually transform this historic pandemic into an endemic, or something much more easily controlled. While some type of winter surge is likely, the economic recovery is expected to continue, putting 2022 on track to be the most ‘normal’ year since 2019.

Patrick Duffy is a Principal with MetroIntelligence and contributes to BuilderBytes. He can be reached at pduffy@metrointel.com or at 310-666-8288.