New Home Construction Continues to Expand

Housing starts, also known as new home construction, came in at a seasonally adjusted annual rate of 1.53 million in October, a 5% gain on September’s figures and the highest since the pandemic began. The strength continues to stem from demand for single-family housing. Many entry-level home buyers are finding themselves priced out of a competitive market. Multifamily construction actually dropped slightly during the month but prospects of a COVID vaccine could bolster rental markets in large metro areas and slow the demand for single-family housing in suburbs.

Single-family starts hit 1.2 million units, the highest level since April 2007. Pent-up and pandemic demand unleashed over the summer did not slow when fall began. Prices have been rising at an unsustainable pace as potential buyers face severe housing shortages in many suburbs. Additionally, vacation property sales have been on a roll with homes going for as much as $70,000 above pre-pandemic prices. Builders are barely keeping up as the supply of housing touched a record low in October.

Mortgage rates rose slightly during the week of November 12 when the first promising news of a vaccine broke. Applications for purchase rose almost 4% but refinancing demand slowed. As additional vaccine candidates are announced and distribution begins, mortgage rates could continue to climb - not good news for those who have yet to jump on the historically low rates.

Building permits remained flat in October compared to the previous month but are almost 3% higher than a year ago. All regions except the Northeast recorded slight gains in the number of permits issued. Constraints on land and labor availability, added to high lumber prices, remain a concern.

The National Association of Home Builders’ (NAHB) sentiment index hit another record high in November as all three components of the index set records. That was captured before news of a vaccine and, according to the NAHB, 69% of the responses were collected before the election was called on November 7. Builders may see prospects dim with vaccine availability; builders’ stocks fell on the news.

The rental market, while strong in many suburbs and some second-tier cities, is suffering in the larger, higher priced urban centers. Expanded unemployment insurance has helped steady rent payments; November rent collections were only slightly below year-ago levels. Smaller landlords with ten units or less are worried about rent prospects in the new year when pandemic benefits will expire. According to the Urban Institute, more than one third of smaller landlords have tenants who did not pay rent in full for October. Some say vacancies are rising, especially those who serve lower-income communities.

Bottom Line
Home builders remain busy as the demand for single-family homes remains strong and the supply tight. The backlog will carry them into the winter months. The housing market is an outlier in its strength during the pandemic. The larger question is what will happen after moratoriums on rents and mortgage payments lapse. We will not see all of the impact associated with those shifts until well into 2021.

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