Single-family Houses Dominate New Construction

New home construction, also called housing starts, came in at a seasonally adjusted annual rate of 1.67 million in December, 6% higher than in November and the fastest pace since 2006. The housing market, at least, completely recovered from pandemic-related losses by year-end; that was driven by a surge in demand for single-family homes across the country. Total single-family units started in 2020 came in 12% higher than last year. That is still not nearly enough to meet the burgeoning demand from prospective home buyers.

Monthly and annual gains for single-family housing starts were broad-based, save for the Northeast. In the Midwest, single-family units surged 67% compared to November; the region is catching up on missed activity due to the ravages of the pandemic in the fall and winter. The South, the largest housing market in the country, continued to grow with a monthly increase of 8%.

In the multifamily sector, the number of building projects with five units or more declined 15% compared to November; for the year, multifamily starts ended 3.2% below 2019 levels. Monthly losses were broad-based except for the West. Our forecast shows investment in multifamily overall will rise in 2021 and hold steady in 2022. According to RealPage, a real estate analytics firm, scheduled apartment completions are expected to top 400,000 in the largest 150 cities, up 17% from 2020.

Building permits rose 4.5% to 1.71 million, ending the year 4.8% higher than 2019 levels. Similar to starts, permits for single-family housing continued to climb, while permits for multifamily slowed in December. Some housing experts say the increased activity could be catch-up following a lull when the pandemic hit in March. The new administration in Washington has signaled that it will push for more housing development, some of which is hindered by current environmental and other regulations, often at the state and local levels. Increasing density, in the form of multifamily dwellings, is considered an effective way to increase the supply of housing while making a smaller impact on the environment.

Home builder sentiment, as measured by the National Association of Home Builders, slipped in January but remained in expansionary territory for the eighth month in a row. Builders said they’re worried about rising materials prices, labor shortages and a lack of housing lots where they can build to keep up with demand. Buyer traffic has been slowing with fast-rising prices pushing some would-be buyers out of the market altogether, even as mortgage rates hit record lows.

The housing market was the focus of one of the executive orders signed by President Joe Biden on his first day; he extended the moratorium on evictions granted in the CARES Act. Longer term, his administration is looking to enable more first-time purchasers with a tax credit. Another potential policy change would forgive some student debt; that is a factor keeping many millennials from seeking homeownership.

Bottom Line
The market for both single-family and multifamily homes is expected to remain strong in 2021. Gains are being driven by pent-up, first-time buyer demand and the shift to work from home. Additional incentives are possible but it remains unclear how the new president will get his agenda through a deeply divided Congress.

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