2 Critical Threats to Housing Affordability in 2021

Filed in Economics, Housing Affordability, Material Costs by on January 8, 2021 4 Comments

NAHB Chief Economist Robert Dietz recently provided this housing industry overview in the bi-weekly e-newsletter Eye on the Economy.

abstract housing economics chartAfter posting staggering growth rates for new and existing home sales in the fall, the housing market leveled off at the end of 2020. The demand-side of the sector remains robust and inventories are lean. However, home price growth and rising construction costs threaten housing affordability heading into 2021.

The overall macroeconomic outlook is expected to improve this year, with gains for GDP growth (after an estimated 3.6% drop for 2020) and incremental labor market improvement yielding an unemployment rate approaching 5% during the second half of the year.

However, these forecasted improvements are dependent on the rollout of the COVID-19 vaccine. Thus far, more than 4 million Americans have received their initial vaccine, and millions more are expected in the coming weeks. Our forecast assumes mass deployment of the vaccine between March and September, which should allow for more normalization of the overall economy and continued strength for housing demand.

While home builder confidence remains near historic highs, single-family starts leveled off in November. Single-family home building increased only 0.4% from October to November. However, the annual rate of 1.19 million was a 10.1% gain from a year ago. For multifamily, a drop in permits suggests apartment construction declines in 2021. Recent data tracked in the NAHB Home Building Geography Index indicate that as part of the suburban shift — the changing geography of housing demand due to the rise in telecommuting and reaction to the virus — single-family construction in traditional second-home communities was up 24% on a year-over-year basis.

The gains for construction are needed to sustain growth in sales. New home sales were far outpacing actual construction in the fall, and as such, we expected that sales growth would slow. Although they were 21% higher than a year ago, new home sales in November declined to an annual rate of 841,000. Existing home sales have slowed as well, as price growth and limited inventory have held back transaction volume. Resales fell 2.5% in November, but remain almost 26% higher than a year ago.

These recent slowdowns illustrate the challenges for the housing industry in 2021. Home price growth has been strong — up 8.4% year over year in October. This exceptional gain is due to strong demand, but also a function of limited inventory. Such prices gains and construction cost increases (lumber prices are on the rise again, up 60% since mid-November, adding thousands of dollars to the cost of a new home) threaten to price out hundreds of thousands of buyers in the months ahead.

While strong demand suggests continued gains for home construction in 2021, affordability declines and supply-side limitations will generate lower housing growth rates than those recorded last year.

To subscribe for free to Eye on the Economy, please email communications@nahb.org.

Comments (4)

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  1. I appreciate this information

  2. Dan Wilson says:

    I’m deeply concerned about the attitude of the lumber industry in regards to the continuing increases in pricing. I’d like to know what efforts NAHB is making in trying to control this unprecedented increase. We, as builders, have been put in a critical position which threatens our margins and the very existence of many of our livelihoods in the industry. The actions of the lumber industry look very similar to the actions of the cement industry in the late 70’s and early 80’s we all know how that turned out. This price gouging must stop. It threatens our success because our margins are severely impacted and the upward spiral of home prices will result in a decline of sales – all while interest rates should be creating an extended period of record growth. The lumber industry and its price gouging mentality is killing the growth.
    I’d like to know what steps NAHB, our association, is taking to help stop, what appears to be price fixing by the greedy lumber manufacturers. We must act now, before our membership is greatly reduced because many of our members companies will cease to exist due to decreased margins. All caused by the uncontrolled price gouging of the lumber industry.
    Please respond so I will better understand what my association is doing to help me and my fellow builders.

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