More house hunters—particularly move-up buyers—are being drawn to new-home construction in the COVID-19 pandemic, so much so that it’s driving a surge in construction across the country.
Single-family starts ended 2020 with the best year in home building since the Great Recession, and 11% higher than 2019. Ultra-low mortgage rates and a shift in housing preferences—including a growing demand for larger spaces, home offices, and outdoor amenities—are driving the increase, said Robert Dietz, chief economist of the National Association of Home Builders, at a press conference Tuesday during the virtual 2021 International Builders’ Show.
Dietz says new-home construction will likely grow by 5% during 2021 and hit above 1 million housing starts for the first time in years. But building can only go so far in meeting the surge in buyer demand since the pandemic, added David Berson, chief economist for Nationwide Mutual. Existing-home sale inventories have been at record lows as homeowners delay selling due to the pandemic. Berson said that as the COVID-19 vaccine becomes more available and the economy improves, he predicts that more homeowners—realizing the equity gains in their homes—will list their existing homes and that could help alleviate some housing shortages. Economists on Tuesday predicted that both existing- and new-home sales will be higher in 2021 due to the rise in buyer demand.
Builders, however, are concerned about several challenges that could affect sales over the next few months, particularly related to rising construction costs. Lumber prices, up 169% since mid-April, are significantly adding to the costs of building a new home. Buyers are seeing the increases in home prices too: A median of $16,000 has been added to the cost of a newly built home from the increase in lumber prices alone, according to the National Association of Home Builders’ data.
Builder surveys show the biggest pandemic-related challenges facing the home building industry are:
- Shortages or delays in obtaining building materials: 96% of builders reported this being an issue
- Local jurisdiction having trouble processing approvals in a timely manner: 78%
- Difficulty in finding workers and subs willing to report to construction sites: 76%
- New ordinances making development and construction more difficult: 60%
- Lots not coming online due to prior suspension of development activity: 46%
- Inadequate public infrastructure in places where home buyers want to live: 34%
- Difficulty obtaining financing for development and construction: 30%
Frank Nothaft, chief economist at CoreLogic, says new-home sales are seeing the most increase in the South and West. New-home demand is highest where population growth has seen the largest growth: Texas, Florida, Arizona, and North Carolina. Texas and Florida accounted for more than half of the U.S. net population increases last year. By metro level, new-home sales levels were highest in Dallas; Houston; Atlanta; Phoenix; and Austin, Texas (based on an annual number of new homes from October 2019 to September 2020), according to CoreLogic data.
Another area of the new-home market seeing a rapid increase in demand: build-to-rent. Nothaft says there’s a growing shift away from interest in high-rise multifamily apartment structures to low-density single-family homes. Annual rent growth is down 3% over the past year for the multifamily market but up 3.5% for single-family rentals.
Dietz notes the build-to-rent market has comprised about 4-5% of single-family starts over recent years. But he predicts that share to jump to 5-6% over the next two to three years. “Builders are preparing to expand this sector,” Dietz says. “Not everyone has money for a down payment, even with low interest rates. So there could be a window of opportunity for this particular market to grow.”