Economic Forecast, Part 3

On today’s show I’m going to share the final segment in this forecast based on highlights from Dr. Duncan’s presentation that I believe are relevant for all real estate investors. On today’s show we’re focusing on new construction. Here we go.

People who are currently homeowners are more fearful of the Corona virus and are not listing their homes for sale. Sellers don’t want strangers come into their house and possibly infect the family. On the other hand, those who are tenants in multi-family apartments are more fearful of the virus in the high density environment than they are of moving. They are taking advantage of the low interest rate environment as an opportunity to buy and lock in an interest rate for a long time. This surge in demand, with a drop in supply is putting a lot of upward pressure on prices. Both Fannie Mae and Freddie Mac are reporting record years for loan originations.

Across the nation there are 2.7 months of inventory on the market. That’s the lowest level since data has been collected.

New home builders have seen a surge in contracts for new homes. The builders will eventually need to catch up and build those homes. It’s hard to say how they will respond to demand for new sales if they get too far ahead of construction. Availability of skilled labor is the constraint in the construction industry right now.

We can anticipate that once the pandemic is under control, whether that is through a an effective therapeutic, or widespread adoption of a vaccine, supply of houses on the market will increase. Depending on the locations for that supply, interest rates for new loans, and the demand at that point in time, we could expect to see a softening in prices.

For now, new home builder backlog is at record levels.

If we go back to 2005 through 2006, the industry had a capacity to deliver 1.4 million new homes a year and sales peaked in 2006 at that level. In the aftermath of the 2008 downturn the industry delivered about 300,000 new homes a year at the bottom of the market. And has been averaging between 500,000 and 600,000 new homes a year for the past 5 years. It’s fair to say that the industry is sized to deliver that volume of new homes. In October, sales peaked at an annualized rate of 1M homes a year which is well above the capacity of the market at current staffing levels. The question is whether the industry can and will grow to to meet the challenge of the higher sales volumes without becoming overheated and perpetuating a boom and bust cycle yet again.

Based on the Fannie Mae data, the outlook for new home construction shows demand for 830k new single family home sales in 2020, a 21% increase over 2019. This is expected to grow a further 6.2% to 881k units in 2021 and remain flat at 881k units in 2022.

2020 has been a banner year for refinance activities, representing a 127% growth over 2019. Next year, refinance activity is expected to contract by 56.5%. Normally a 56.5% contraction would be a huge deal. But it will basically match 2019 refinance volumes and 2019 was a banner year for refinance activity.

Based on everything I’m hearing, I going to go out on a limb and predict that single family new construction for rental is going to be a product that is in high demand. In particular, I believe that new construction townhouses which live like a single family home are going to be in high demand because they are more affordable than a detached home. The drive for affordability is going to influence demand for the coming next several years.