As the economy bursts open again, housing is expected to continue leading the surge.
By Patrick Duffy
When economists in the future look back at the COVID-19 pandemic in the United States, they’ll probably note two major things: a rapid economic rebound which turned into a boom and an acceleration of long-term trends in technology which impacted land use in multiple categories.
A year ago, initial forecasts for a post-pandemic rebound were quite dour. History has shown that vaccines can take years to develop while economies limp along awaiting a medical solution or herd immunity. However, these forecasts failed to take into account two significant breakthroughs of science and technology: over a decade of research into new vaccine methods and the ability for many employees to work from home.
GDP growth, which rebounded at 33.4% in the third quarter of 2020 before settling back to 4.3% a quarter later, is now projected by the Federal Reserve to grow by 6.5% in 2021 due largely to pent-up demand and historic stimulus payments boosting household finances. Goldman Sachs is even more bullish, looking for a growth rate of 8.0% by the fourth quarter of the year.
Although the stock market began its 2020 rebound earlier than housing, a combination of factors including favorable demographics, record-low mortgage rates, pent-up demand and a shift to remote work are expected to provide tailwinds to the housing market at least this year and into 2022. Even as prices reduce affordability for entry-level homebuyers, the rising share of the single-family rental (SFR) and build-to-rent (BTR) markets are already capturing a growing slice of overall homebuilding.
Following a difficult February with severe winter weather and a vaccine roll-out still gaining steam, by March, housing starts had surged 37.0% year-on-year to an annual rate of 1.74 million – the highest rate since 2006 — and not far off the reported annual rate of 1.76 million building permits. Still, with an analysis by Freddie Mac estimating an accumulated shortfall of 3.8 million new homes through the end of 2020, only with sustained production at this level or more can this shortfall be addressed.
An additional pressure for home builders comes from some dysfunction in the existing home market, in which many sellers are reluctant to list their homes without first knowing where they will live next. For-sale inventory, which the NAR says fell nearly 30% year-on-year in February to a record low of 1.03 million units (or an inventory timeline of 2.0 months), sold in an average of just 20 days and helped pushed up prices 15.8% during the same time period to $313,000, which all regions posting double-digit gains.
“Although the stock market began its 2020 rebound earlier than housing, a combination of factors including favorable demographics, record-low mortgage rates, pent-up demand and a shift to remote work are expected to provide tailwinds to the housing market at least this year and into 2022.”
More recent data from Redfin for March versus February suggested even more pressure in the 95 markets in which they are active, with prices rising 5.3% from February as inventory fell 3.0%, sales fell 2.4%, months of inventory declined half a month to 1.1 months and 42% of homes sold over list price. These bidding wars likely helped pending sales rise 22% year-on-year, even with significantly fewer listings.
While the Census Bureau showed that the months of supply for new homes in February was healthier than those for existing homes at 4.8 months, new home mortgage application data from the Mortgage Bankers Association for March showed sales rebounding 12% during the month, which will likely shrink that inventory timeline further.
For now, consumer confidence is on a sustained rebound, with an early April survey by the University of Michigan’s widely watched Sentiment Index posting its best level in a year due to more stimulus spending, low interest rates and increased vaccination rates. For the housing market itself, Fannie Mae’s Home Purchase Sentiment Index rose sharply in March to a five-month high, especially for sellers eyeing low inventory and rising prices.
If there is one giant uncertainty, it would be the permanent impact of more liberal work-from-home policies introduced during the pandemic. A recent survey by KPMG showed that only 17% of CEOs planned to reduce office space, down sharply from the nearly 70% in August 2020, and just 30% plan to have employees working remotely two to three days per week. Meanwhile, another study by staffing firm Robert Half showed 49% of employees preferred the flexibility of a hybrid work arrangement, and one-third of those already working from home would look for a new job if required to return to the office full time. Consequently, whoever wins ‘the battle of the office’ will thus influence the geography and preferences of future housing demand.