As the world retreated to working from home in March 2020, living rooms, dining rooms, and even laundry rooms doubled as office spaces for many. This, coupled with the extended time spent within the confines of home, ignited a national appetite for change. From home renovations and expanded outdoor spaces to the desire for geographic relocation or a dedicated home office, demand for all things home improvement and real estate boomed.
“With the economic shutdown, it looked as though the housing market would decline materially,” said Danny Hill, head of Homebuilder Finance at Regions Bank. “In late May 2020, we began to see signs of pickup. By summer 2020 on, the growth in the housing market has been greater than any other time we’ve seen in the history of homebuilding industry statistics.”
Supply Chain Chaos, Soaring Prices
During the third quarter of 2020, concerns about the costs of construction materials began to rise. Lumber mills were unable to operate at full capacity due to pandemic-driven supply chain disruptions and staffing challenges, resulting in shortages. This shift of increased demand and decreased availability across the supply chain caused materials prices to rise, leading to a significant increase in new home prices. According to NAHB statistics, by February 2021 the price of an average new single-family home increased by $24,000 due to the cost of lumber alone.
A Backlog Creates a Boom
The housing market was already strong before the pandemic, but another real estate phenomenon stemming from COVID-19 was a swift decrease in the supply of existing homes. While the world was still grappling with understanding the ways that the virus spread, people were hesitant to host potential buyers for open houses or even realtor showings – and opted to remain in their existing homes, at least initially. People anxious to move out of high-density cities and into more suburban or rural settings had little inventory to choose from, driving demand and sending prices even higher.
“There is always some price premium for buying a new home over an existing home,” said Kevin Barron, Regions Homebuilder Finance credit executive. “Early in the pandemic, that differential became less of a factor, so you could get a new home for a lower premium. The price of existing home inventory increased due to the lack of supply, shrinking the gap between new home and existing home sales prices.”
However, Barron shared, as the price of new homes increased dramatically due to increased demand and higher costs of construction materials, the differential returned to pre-pandemic levels. Now data is showing that to get a new home, people are more willing to move further outside of the cities and major metropolitan areas and into the suburbs and rural communities. This often allows them to buy larger homes with dedicated office space and acreage for outdoor living. New home builders are seeing strong backlogs of demand and continue to see good buyer traffic as we start a new year.
“We entered 2022 with record backlogs for home builders nationwide,” Hill added. “The Florida and Texas markets are particularly strong as we see migration to these regions from New England, the Mid-Atlantic, the upper Midwest and California.”
Homebuilders continue to struggle to meet demand. However, the rate of growth is returning to normalized levels after the record highs of 2020. One factor driving the momentum: near-historic-low mortgage interest rates, allowing many to spend more on a new home. However, these rates have increased recently.
“When we begin to hear speculation of rate increases, mortgage markets will typically price that in,” said Hill. “We are seeing that people are ‘getting off the fence’ ahead of rate increases, which is increasing backlogs.”
New Home or Renovation? Be Patient
The well-publicized labor shortage is also impacting the homebuilding sector. It is difficult to get contractors and other building experts in a timely manner. The bigger players in homebuilding have an advantage as they are better able to control their destiny, receiving preferential access to materials and bigger influence with subcontractors.
In addition, cycle times have extended for homebuilders. While it typically would take seven to eight months, according to the US Census Bureau, today we are seeing this process taking an additional 60 to 90 days.
“Sometime in 2021, when cycle time began to be a huge factor, builders became less likely to write a contract with a buyer for a new-build product,” said Hill. “They began building more spec houses in order to set prices at the end of the building process, when the actual costs were known.”
Hill shared that this has impacted the need for capital across the Regions’ Homebuilder Finance footprint.
“Most builders have adopted a strategy of starting more spec products and fewer pre-sold houses as a way to work down their pre-sold backlog. This helps them to maintain margins, but also allows them to make quicker deliveries once contracts are written. If they are successful in doing that, 2022 will be another strong year.”
The spring and summer selling seasons are ahead and are typically more active than the other seasons, with families preferring to move before the school year begins. The question remains if the persistent rising prices of construction materials – and homes – will impact that trend in the months ahead.
“It is a little surprising that the demand remains so strong despite the fact that prices continue to rise,” said Hill. “In May 2020, we had a client tell one of our Relationship Managers that they were still being cautious because the costs of materials were increasing significantly, but they were not sure why they were being so cautious because their backlogs were not dropping off.”
Uncertainty Remains Name of Game
One thing we have learned through the course of this pandemic is that the ‘new normal’ seems to be uncertainty. The housing market has been somewhat unpredictable as Regions Chief Economist Richard Moody points out in his latest economic update “December New Home Sales: Don’t Get Too Attached To The Headline Sales Number.”
“Total new home sales rose to an annualized rate of 811,000 units in December, easily ahead of expectations,” said Moody. “At least for now. In keeping with the pattern seen over the past several months, estimates of sales in prior months were revised meaningfully lower.”
Moody added that while higher rates will curb demand, they won’t choke it off, and even if demand does fall further than we think it will, clearing order backlogs will keep builders busy for some time.
Access this full report and additional economic commentary for the latest updates on Regions’ Doing More Today.