Despite inflation concerns and ongoing production bottlenecks, home builder confidence edged higher for the fourth consecutive month on strong consumer demand and limited existing inventory.
Builder sentiment in the market for newly built single-family homes moved one point higher to 84 in December, according to the NAHB/Wells Fargo Housing Market Index (HMI). This ties the highest reading of the year that was posted in February.
“The most pressing issue for the housing sector remains lack of inventory,” NAHB Chief Economist Robert Dietz said in prepared remarks. “Building has increased but the industry faces constraints, namely cost/availability of materials, labor and lots. And while 2021 single-family starts are expected to end the year 24% higher than the pre-Covid 2019 level, we expect higher interest rates in 2022 will put a damper on housing affordability.”
Homebuilding is a Growth Area for One Law Firm
Indeed, Cox, Castle & Nicholson’s building clients have experienced a dramatic increase in demand for single-family homes since the onset of the pandemic as living in urban areas became less attractive and employers allowed or required that their employees work from home, Matthew Wyman, a partner with Cox, Castle & Nicholson, tells GlobeSt.com.
“Some of our clients have reported that this trend has slowed a bit, but they feel that the fundamentals around homebuilding remain strong given limited supply.”
Prior to the great recession, the homebuilding sector represented one of Cox, Castle & Nicholson’s largest area of growth in terms of legal work. After the great recession, the demand was “milquetoast at best,” Wyman said, and in the residential sector “there was much more emphasis on multifamily deals and build to rent.”
By June 2020, when the pandemic had settled in and people were wanting homes again, “all of the sudden our for-sale residential work was once again a hot area.”
Based on client feedback, “we anticipate this to continue into at least the first quarter of 2022 as builders and the capital behind the builders continue to be very aggressive in pursuing homebuilding sector acquisitions and investment.”
Demand is Still ‘Running Strong’
Nick Grandy, Construction and Real Estate Senior Analyst with RSM US LLP, tells GlobeSt.com that the recent increase in the home builder sentiment index is proving that demand for housing is still running strong. “Home builders are exuding with confidence as we head into 2022 despite some notable headwinds including housing affordability, supply chain disruptions and on-going labor shortages present in the industry.”
The Federal Reserve is also currently clearing a path for reduction in tapering and there are anticipated rate hikes in 2022, which will likely continue to sour housing affordability with mortgage rates moving in step with 10-year treasury yields, Grandy said.
“On top of affordability impacting demand, home builders are also dealing with supply issues, notably, a continued rise in materials prices from products such as steel, insulation material and lumber (which despite being down from springtime highs, is still up over 40% from pre-pandemic levels), which are critical in the building of homes and could slow down growth in the market,” Grandy said.
“Despite these challenges, builders will likely continue to reap the benefits from a significantly suppressed supply of inventory in the existing homes market.”
As of October 2021, inventory of single-family homes was at 1.1 million homes and inventory levels have been right around the 1-million-unit level for the previous year, representing the lowest levels ever recorded.
“These limited inventory levels will push home owners to the new home market, creating growth for home builders,” Grandy said. “On top of this, builders are seeing high demand from investors as the build-to-rent sector continues to attract capital, which will help to further drive growth.”
Supply Chain, Materials and Labor Costs a Concern
There are some unknowns ahead for 2022, such as rising inflation, according to Jonathan Kanarek, managing director at BuildFax, a Verisk business. He notes that single-family housing authorizations fell slightly by -0.23% year over year in November, however, the trailing three-month outlook remains positive.
“The pace of growth has slowed across new construction in recent months as homebuilders have been impacted by supply-chain disruptions, labor shortages, and expensive building materials,” Kanarek tells GlobeSt.com. “Looking ahead, strong consumer demand and higher-than-expected homebuilder confidence could help buoy the housing shortage.”