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Multifamily Drives New Construction

RFP
Housing starts, also known as new home construction, came in at a seasonally adjusted annual rate of 1.55 million in November, a slight increase from October; growth was driven by activity in the Northeast and West. The Midwest, where the worst of the latest COVID surge began in early November, and the South posted lower construction figures.

For the first time since July, multifamily construction came in stronger than single-family as home builders worked their way through significant backlogs. The severe shortage of existing homes has led would-be buyers to build. This has exacerbated backlogs and material shortages. Skilled carpenters are in short supply, despite another rise in COVID-related layoffs in the overall economy. Prices are surging, which has not stopped those unaffected by COVID from buying.

Buyers have been tapping home equity to levels last seen in late 2007. According to Freddie Mac, the volume of cashed-out home equity and HELOC consolidation totaled $59.2 billion in the third quarter. Over the course of the current housing boom, U.S. homeowners have watched their equity rise by an estimated trillion dollars, according to CoreLogic. This type of increased wealth can boost homeowners’ ability to buy a second home or take on a renovation.

Building permits rose to 1.64 million in December, with all regions registering increases in permits. This level was last seen in September 2006. Permits for multifamily homes surged as more renters flocked to smaller cities and suburbs. This could slow if mass vaccinations lead many to return to larger cities.

Home builder sentiment, as measured by the National Association of Home Builders, fell slightly in December from the record-breaking November level, but still remains in high territory. All three components of the index fell, including present sales of single-family homes. That shows that in the middle of a pandemic-induced housing boom, with very low existing supply, rising prices are starting to deter potential buyers.

Significant material constraints, especially for lumber and plywood, have hampered builders’ abilities to meet the demand for new homes, driving up costs and delaying schedules. Lumber prices have come down from a peak in the spring but remain high (60% above pre-pandemic levels). For wealthier buyers, rising prices are not a problem but the increasing time to complete a home is leaving many frustrated.

Lumber producers have been slowing production over the past few weeks despite robust construction demand. The good news is that the U.S. Commerce Department has halved tariffs on Canadian lumber, but home builders advocate for the complete scrapping of tariffs. The incoming administration could decide to work with Canadian officials on maintaining a steady supply of lumber.

As of December 6, mortgages in forbearance fell to 2.7 million; fewer mortgages of all types went into forbearance. The majority of forbearances were extensions allowed by the CARES Act. Sadly, many homeowners have become delinquent because they were not aware of mortgage forbearance protection; The Urban Institute estimates there are 300,000 such borrowers. An additional 476,000 borrowers became delinquent after exiting forbearance; that number will likely grow as forbearance extensions lapse in the spring of 2021. Not all borrowers will be able to enter loss mitigation with their lenders and may end up defaulting. The silver lining is that with home equity expanding, many will be able to sell their homes rather than enter foreclosure. However, the stain left on credit reports can harm future ability to borrow.

Bottom Line
As the economy cools off entering 2021, we expect the housing market to remain strong. Affordability will remain one of the top challenges for buyers and builders as supply constraints boost prices. Even with vaccinations available in 2021, many will continue to work from home; we see the demand for housing increasing, particularly if federal housing policies become more supportive of first-time buyers and if builders focus on the potential volume in starter homes.

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Karen Nye
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Karen.Nye@us.gt.com

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