NAHB Chief Economist Robert Dietz recently provided this housing industry overview in the bi-weekly e-newsletter Eye on the Economy.
The 10-year Treasury rate temporarily increased above 1.75% this week — reaching a 14-month high. This is well ahead of forecast and will push interest rates above 3.3% for the average 30-year fixed rate mortgage.
According to recent estimates published by NAHB, the rate increase over the last few weeks prices out approximately 1.3 million households from being able to purchase an average home. Combined with unsustainable growth in home prices (up an average of more than 11% over the last year) and rising construction costs, it is clear that housing affordability is trending lower.
Fortunately, buyer traffic remains strong, consumer confidence is at a post-recession high and prospective buyers have increasingly accumulated additional savings during 2020 due to lack of service sector purchases. Nonetheless, as economic growth expectations increase for 2021, higher rates and higher input costs should be expected over at least the next 12 months.
Additionally, a proposed large tax/spend infrastructure plan is a wild card in the outlook given possible impacts on the federal deficit. Nonetheless, home sales started the year weaker, largely because of affordability and weather-related factors. New home sales declined 17% on a monthly basis in February, but remained 8% higher than a year ago.
However, pricing is headed higher — up 5% over the last 12 months — as input costs (most notably lumber) experienced gains. The February dip pushed sales down from the unsustainable surge of the second half of 2020 and back to a somewhat slower post-Great Recession growth trend. Existing home sales fell to a six-month low as incredibly tight inventory conditions frustrated buyers.
Despite rising rates and historically low inventory, geographic and market trends suggest growth for home construction. For remodeling, the aging of the existing housing stock offers significant business opportunities. The typical home in the United States is 39 years old, with older stock in the Midwest and Northeast.
The second-home housing market continues to be hot, with 15% of recent new home sales attributed to second-home buyers, according to an NAHB survey. And the suburban shift in housing preferences, with gains for the share of home buyers looking for homes in the outer suburbs, will tend to favor new construction. This will allow reductions in land costs to offset some of the gains in material pricing in lower-density markets or those with significant numbers of telecommuters.