After a better than expected start in 2020, the U.S. housing market declined in March and April related to the effects of the COVID-19 pandemic. Despite the ensuing recession and notable job losses, housing starts, and subsequent demand increased significantly beginning in late May 2020 and continued through year-end. A noticeable phenomenon occurred throughout this time – and its impacts, though uncertain then, are ongoing and record setting.
Larger builders were funding operations from a record level of sales, and as a result, the demand for financing was considerably lower. Recently, we have observed increased funding on client facilities, thus indicating operations are beginning to return to pre-pandemic norms.
Regions Homebuilder Finance production volume continues to approach and even surpass 2019 levels, and we anticipate 2021 will result in the highest construction commitments achieved post-Great Recession.
The National Association of Homebuilders (NAHB) Housing Market Index fell to 75 in August, down from 80 the previous month. The index correlates closely with broad measures of consumer confidence – thus a reading above 50 indicates a favorable housing outlook. While the score has fallen 15 points since the all-time high of 90 in November 2020, the August score exceeds all but one monthly score exhibited in 2019 (a 76 in December). Year-over-year (YoY) comparisons will be difficult for the rest of the year, as all-time highs were recorded in September, October and November 2020.
Builders continue to experience strong demand and high levels of buyer traffic. NAHB data for July of 2021 indicates an available supply of 6.2 months, the highest recorded in the last 12 months. While inventory is rising, 29% of the homes have not been started (i.e., permits have been obtained, but no construction has commenced), versus 20% a year ago. The increased supply can be attributed in part to the increase in new home sales prices impacting consumer demand. Perhaps more importantly, builders have deliberately slowed sales and increased speculative starts to address the historic imbalance between supply and demand.
Data published by the Census Bureau reflects that 367,000 new homes were listed for sale as of July 31, resulting in the 6.2-month supply. Increasingly, comparisons with 2019 appear more relevant given the historical nature of 2020. As of July 31, 2019, 331,000 new homes were listed for sale, again equating to the 6.2-month supply.
While a six-month supply is considered to be a market in equilibrium, some industry experts contend inventory is still undersupplied. However, it is important to note that the recent increase in supply is much needed.
Important factors in the enduring strength of consumer demand include continuing low mortgage interest rates, which remain in the 3% range for a 30-year conventional fixed rate loan. In addition, there is heightened focus on the importance of more and higher quality space, and solid demand exists in suburban and even exurban (areas beyond the suburbs) markets. The return to the suburbs began a few years ago and accelerated in response to the pandemic. The increasing acceptance by employers of a remote workforce and the emergence of the Delta Variant will likely result in a continuation of this trend.
Rising building material costs, coupled with the lack of inventory, have caused the median new home sales price to increase from $329,800 to $390,500, an 18% increase in a year. The percentage of homes sold priced below $300,000 decreased from 42% to 24%. Since April of 2020, skyrocketing lumber prices contributed greatly to the price increases. The composite price of framing lumber reached its peak of $1,500 per thousand board feet in May of 2021 and has since fallen to approximately $400. However, the overall prices of the wood products used in homebuilding continue to soar. Examples include the prices of softwood plywood and oriented strand board (OSB), which have increased by 200% and 500% respectively, since April of 2020.
Supply-side constraints continue to force the intentional slowing of sales. Builders continue to phase-in the release of lots in active subdivisions as well as delay writing contracts until further along in the construction cycle. Interruptions in virtually all points of the supply chain have extended construction cycle times and forced builders to look for alternative suppliers. Large builders continue to be able to negotiate the best prices for developed lots, construction materials and labor. We have not seen a material increase in contract fallout, at least from the perspective of the buyer.
At the center of the factors at play in today’s housing market is the fact that the demand for housing is still very strong.
While demand remains near an all-time high, there are reasons for caution in terms of increases in lot and construction costs amid the continued spread of COVID-19. Despite commitments by the Federal Reserve to keep short-term rates low for the foreseeable future, upward pressure on mortgage rates is likely. Regardless of these caution flags, industry experts cite the various strategies being employed by builders to address the supply and demand imbalance, in conjunction with the potential for strong economic growth, as causes for optimism. As such, the outlook for new home sales remains positive through the remainder of 2021 and into 2022.
Danny Hill is head of the Homebuilder Finance group at Regions, which serves the homebuilder industry by providing loans for new home construction, lot purchases and development, and ancillary banking services.