The housing industry has been a strong sector of the economy again in 2021.  Housing began this decade with strong demand generated by millennials and baby boomers on the move.  The decade started with a severe housing deficit of approximately 3.8 million homes according to Freddie Mac.  Inventories of both existing and new homes for sale are at historic lows.  During the last decade, the ability of the home building industry to respond to the housing shortage was diminished by the housing recession with the loss of about half of the home builders, trade contractors and tradesman. 

Increases in Demand and Prices

2020 began with very strong home sales prior to March 12, when the pandemic closed down the country.  Housing recovered immediately after the shutdown with exceptionally stronger housing demand.  By the beginning of 2021, there was effectively no available inventory of existing or new homes with 1.9 and 3.6 months respectively of for-sale homes supply.  

Most of the new for-sale homes inventory (85.7%) was either under construction or not started.  Completed homes ready for delivery only represented about half a month’s supply.  Most home builders had very large sales backlogs and could not adequately respond to the volume of housing demand due to construction capacity constraints, shortage of construction trades and labor, rising construction costs (especially lumber), and finished lot inventories.  In response, builders aggressively raised prices, rationed sales to match their production capacity and finished lot inventories, and delayed sales until after construction was through framing.

Building Permits Up 20%  

As the industry enters 2022, the overall demand for housing remains strong and home builders’ attitudes are positive about the new year.  While the industry still has labor shortages, supply chain issues, and inflationary cost issues, builders feel they are better positioned to deal with these issues going forward.

By of end of October, builders had obtained 20.0% more building permits than the same period last year.  Single-family permits increased 17.3% and multifamily permits were up 25.7%.  Total homes started through October were 17.0% ahead of the same period last year.  Single-family housing starts rose 16.7% while multi-family starts were up 17.8%.  During the last several years, many industry forecasters have been predicting an over building of multifamily housing.  I have been predicting a strong multifamily segment market. I think this segment still has a lot of strength going forward.  There is strong demand for apartments in suburban areas and in smaller, rural, and southern communities.  The current apartment vacancy rate is under 5.0% and rental rates have been surging. 

Hot Existing Home Market
 
The existing home market has been very tight for several years.  At the end of November, there was only 2.1 months of inventory with the number of homes available decreasing 13.3% since last year.  Generally, a balanced market has about 6.0 months of supply available for sale.  Currently, existing homes are only on the market for 18 days, with 83% of all the homes being sold within 30 days.  

Throughout the year, existing home sales were very strong.  The seasonally adjusted annual rate of sales in November was 6.46 million homes which was the seventh month this year of sales exceeding 6.0 million.  During the last twelve months, the median existing home sales price has increased 13.9% to $353,900.  Housing affordability has eroded according to the affordability index for existing homes which has dropped 11.5% since last October. The monthly mortgage payment has increased from 14.9% to 16.9% of the median family income.  Homebuyer frustration with the lack of inventory seems to be more of an issue than affordability at this point.

Builders Purposefully Slowing New Home Sales

New home sales by the end of October were trailing last year’s sales by 4.4%.  Builders have been constraining sales to reduce their backlogs and limit their exposure to inflationary cost increases, and because of construction delays due to supply chain and labor issues and limited finished lot inventories.  Builders have been aggressively raising sales prices (beyond where they thought homebuyers would push back) in an effort to slow sales.  Sales remained brisk.  Many builders are taking reservations for limited monthly home releases, pricing homes at the beginning of each month.  Others are not pricing and releasing homes for sale until the house is through framing.  

The median new home sales price since last October has increased 17.5% to $407,700.  New home inventory has increased from a very low 3.5 months of supply to 6.3 months of supply.  However, only 9.3% of the inventory is complete and ready for delivery which represents only 20 days of supply.  Over 90% of new home inventory has not been started or is still under construction.  At this point, with the tight inventory of both new and existing homes, a homebuyer’s only effective option is to buy a to-be-built home.

Impact of Inflation

The FED has finally acknowledged inflation is not transitory.  Currently, the consumer inflation rate is running at 6.8%. Consumers are feeling it at the grocery store, gas station and retail stores.  It has impacted consumers’ attitudes about their current and future expectations.  Wholesale prices have increased 14.3% and the price increase for residential construction products has increase 17.3%.  The FED is late taking action against inflation which will now be harder to rein in.  It will probably get worse before it gets better and could extend into the later part of 2023.

 The FED will start tightening monetary policy in 2022 by doubling the reduction of the monthly purchase of Treasure and mortgage-backed securities, and will begin increasing interest rates by 75 bps next year and 200 bps over the next three years.  I think this is too late and too timid a response to the inflationary pressures in the economy at this point.  

Mortgage interest rates have been gradually increasing over the last several months with the rate on a 30-year fixed rate mortgage loan in October at 3.07.  The national rate had increased to 3.12% by December 16.  The actions necessary to attack inflation will increase mortgage interest rates which will impact housing affordability and home buyers’ mental attitude about home buying.  The housing need will be there but the housing demand (need, desire, and ability) might not be present because of the economic issues.  By the end of 2022, the mortgage rate on a 30-year fixed rate mortgage is being forecast to be 3.7% which will have a very negative impact on demand.  Builders should be looking at developing programs to counter increasing interest rates such as ARM’s, interest buy downs, interest locks, etc.  Builders will need to dust off their old sales tools and programs.

The Numbers

Total new home construction starts will end this year at 1.6 million homes which represents a 16.1% increase over 2020 residential construction activity.  Single family home construction will register a growth of 14.0% totaling 1.13 million starts, and multifamily construction will equal 470,000 housing units with a growth of 20.8%.  The multifamily segment of residential construction has been very strong this year with a large number of units coming on the market next year.

Existing home sales will end this year with a strong 6.13 million homes sold, representing an increase of 8.7% over 2020.  The existing home market is very tight with only 2.1 months of supply, the typical home only staying on the market for 18 days and 83% of the sold homes sold were available for less than 30 days.  The median sales price for existing homes during 2021 will be $345,000 representing a 16.3% increase over 2020.

New home sales will finish this year at 795,000 which is a drop of 3.3% from 2020.  The demand for homes has remained strong.  The reduction in sales is due mainly to supply issues created by inflationary spiking construction material (especially lumber) and labor cost, supply chain issues causing major construction delays, and limited finished lot availability.  New home inventories have expanded during the year mainly due to construction delays with over 90% of the current inventory either not started or under construction.  There is only about a 20-day supply of completed homes available for sale.  Since last year, the new home median sales price has jumped 17.5% to $407.700 in October.  The average median sales price for new homes for the year will be $390,200 which represents an increase of 15.8% over the average for 2020.

Caution Flags in the Forecast

Next year will remain a sellers’ market for housing but there are a number of caution flags.  Inflation will remain a problem throughout 2022 (and probably 2023).  We have already received a number of notifications from building product manufacturers of 10% to 12% price increases effective as of January 1.  Supply chain issues will continue throughout the year.  The shortage of skilled construction labor will persist, and the limited finished lot inventory, while easing, is still an issue.  By the end of 2022, mortgage interest rates are projected to rise to 3.7% as the FED finally takes action to counter inflation.  Increasing interest rates will have an impact both on demand and continuing tight existing home inventory.  Baby boomers and early Gen Xers will opt to stay put in their current oversized homes with lower interest rates and remodel instead of entering the housing market.

For 2022, I am rather aggressive on my forecast for new construction.  I have moderated the forecast down to account for some impact by the general economic caution flags. Home builders still have large backlogs of sales either on reservation lists, sold but not yet started, or under construction.  The multifamily segment of the market will remain strong as Gen Z enters the housing market and the pandemic crisis eases.  Total housing starts are forecast to reach 1.75 million in 2022 which represents a 9.3% increase.  Single family housing starts will reach 1.25 million which is a 10.6% increase.  Multifamily homes should continue with a strong showing in 2022 with 500,000 starts mostly in the southern second-tier cities and suburbs.  This represents a growth of almost 6.4% even though there are a lot of multifamily housing units under construction which will come to market in 2022.

Existing home sales should have another strong year with sales increasing 6.0% to 6.5 million sold homes.  The limiting factor on the existing home sales growth will be the availability of inventory.  The average median sales price for existing homes in 2022 will increase about 12.0% to $386,000.

New home sales should expand in 2022 by 12.0% to 890,000 homes.  Construction costs are going to increase 10.0% to 12.0% in 2022, causing pressure for builders to raise prices to cover costs. The market will remain tight with a shortage of both new and existing inventory.  The average median sales price for new homes in 2022 is forecast to increase 14.0% to $445,000.  

Builders are retooling their home offerings to reduce lot sizes, decrease square footage, simplify house plans, and reduce standard features to counter the cost pressures and homebuyer affordability issue.  These efforts could dampen the median sales price increase.

There is enough uncertainty about the impact Washington, D.C. actions will have on the economy in 2022, that I would recommend builders develop contingency plans now to be able to respond quickly to potential economic changes.  When developing plans, determine what indicators to pay attention to and what will be the trigger points where an action plan will be implemented.  Builders historically have missed turning points in housing markets.  We are all eternal optimists in this business.

All my best for a very successful 2022.