Market Trends January 2021
Construction Forecasts for 2021
Dodge expects a slow road to recovery in 2021, with the economy remaining in slow-growth mode for at least the first three months. Dodge reports a 14% decline in the dollar value of construction starts in 2020, with an expected rebound of 4% in 2021.
Dodge estimates that total residential starts will rise 5% in 2021, after dropping 2% in 2020. They expect single-family starts to rise 7% to $254 billion in 2021 after increasing 4% in 2020, one of the few markets Dodge tracks that rose in 2020. Dodge analysts say that lower mortgage rates plus the trend to working remotely are encouraging people to leave high-density, high-cost urban and urban fringe areas and move to more ex-urban and rural areas.
NAHB estimates a 3% increase in single-family starts in 2021 and a 2% rise in 2022. NAHB expects multifamily starts to drop 2% in 2020 and plummet 15% in 2021.
Construct Connect Chief Economist Alex Carrick says he is now feeling more optimistic about the outlook for some construction sectors, particularly residential housing, which is booming in both the US and Canada. He noted that the US savings rate has nearly doubled, from a pre-pandemic 8% to 15%, which means more people have been able to more quickly accumulate money for a downpayment or a move. In addition, after decades of dropping mobility, Americans are on the move again, seeking out single-family homes in the suburbs and beyond and trying to take advantage of historically low interest rates.
Aging Homes, Migrating Millennials
More than 50 million homes in the US are more than two decades old, according to a report in National Real Estate Investor (NREI). Millennials, now the largest segment of the US population, are migrating to suburban living. NREI commented favorably on The Home Depot’s acquisition of HD Supply and noted that the shift to the suburbs and beyond will probably create a multi-year cycle of increased deal making in the home improvement sector, which should continue booming as homeowners embark on bathroom and kitchen remodels and other large projects in addition to the maintenance and face-lifts required by aging structures. In addition, many people are remodeling homes to accommodate working remotely and schooling from home.
The Future of the Single-Family Home
The single-family home became the American Dream after World War I, when President Herbert Hoover introduced the “Own Your Own Home” program. Today, except for the wealthiest Americans, their home is the average family’s single largest investment.
NAHB’s third quarter Home Building Geography Index (HBGI) revealed that home buying preferences are shifting. Telecommuting necessitated by the CV19 pandemic is providing consumers with the flexibility to live further out within large metros or even to relocate to more affordable, smaller metro areas. That trend has been accelerating for several months.
Suburbs of medium-sized cities posted the greatest single-family gains in the third quarter, with a 15% growth rate over the last four quarters. The worst performing regions were large metro urban cores, with just a 5.7% gain. Similar results were observed in multifamily, with large metro core areas posting a 4% decline for apartment construction.
The growing demand in lower density markets stems from the fact that housing is less expensive compared to urban areas and buyers can afford larger homes to accommodate home offices, exercise rooms and other specialty rooms, all in higher demand since the pandemic, according to NAHB Chairman Chuck Fowke, a custom home builder from Tampa, Florida.
Multigenerational living is also on the rise, undoubtedly boosted by the pandemic. Generations living together can share household chores, childcare and create their own pandemic “bubble” to combat loneliness. In 2018 the US had the highest rate of multigenerational living since 1950, driven by young adults living with their parents in order to save enough money to get a place of their own. The pandemic has boosted multigenerational living even further.
The trend to remote working and multi-generational living has also popularized accessory dwelling units (ADUs), such as back-yard cottages and converted garages, as well as in-home renovations such as in-law suites, home offices and school/activity rooms. Today average family size is just 3.14 people, and nearly one-third of Americans live alone.
The Virtual Office is Here to Stay
Home offices and working remotely may be here to stay, with many companies now exploring hybrid models or offering some workers the option to continue working remotely. Companies save money and employee productivity has gone up, with many employees reporting that in addition to being more productive, they are happier. They don’t waste time chit-chatting, avoid interruptions and don’t get involved in office politics.
Employees also report working remotely is like getting a raise, because they have no commuting costs, don’t have to eat meals out and are not tempted to shop or go out after work. In addition, in a virtual meeting everyone is “equal,” taking up the same amount of cyberspace and having an equal ability to be seen and heard.
Some business analysts caution that companies will have to work harder to encourage collaboration and the free exchange of ideas in a virtual world that does not allow for casual conversations. Others note that one of the unexpected benefits of being forced to go virtual has been their ability to include more people in meetings and brainstorms and reach out to experts around the world they might not have been able to connect with previously. In a recent survey reported in The Washington Post, roughly 70% of companies now expect to downsize their office space.
Lumber Prices and Tariffs
Lumber prices hit an historic peak in September 2020, with the composite price of random lengths of framing lumber hitting $950 per thousand board feet, up from $350 in mid-April. Prices fell back to around $550 in mid-November, then started to rise again, hitting $750 the week before Christmas. The National Association of Home Builders (NAHB) worked with 100 lawmakers to appeal to President Trump to address the high tariff on softwood lumber shipments to the US from Canada. At the end of December the Commerce Department reduced duties from more than 20% percent to 9%. Tariffs have contributed to unprecedented price volatility in the lumber market in 2020, leading to upward pressure on prices and reducing housing affordability for American consumers. NAHB noted that the US needs to work with Canada to end the tariffs and achieve a long-term, stable solution in lumber trade that provides for a consistent and fairly priced supply of lumber.
The Pandemic Recession
The Great Recession that began in 2008 devastated the finances of millions of Americans, sent the stock market into a tailspin it took two years to recover from and was followed by a long and uneven recovery. But since the pandemic began in March 2020, Americans have paid down credit card debt, saved more and seen their household net worth jump to record highs, fueled by a booming stock market and climbing prices for both new and existing homes, according to an analysis by The Wall Street Journal.
Economists believe that the impacts of the Great Recession were prolonged in part by the slow and limited government response. Lessons learned in 2008 were quickly applied this time around, with a $2 trillion stimulus package rolling out in March, including stimulus checks for most Americans, extra unemployment benefits and aid targeted at businesses which helped them stay solvent and keep people on the payroll. Mortgage forbearance staved off foreclosures and helped head off a 2008-style housing bust.
Banks and lending institutions were blamed in large part for the 2008 crisis; this time around they worked hard to be seen as the good guys and waived fees, helped borrowers pause debt payments and otherwise tried to help keep people and businesses on their feet. One reason they could do that is that tough regulations imposed after the 2008 debacle insured that financial institutions had robust reserves and were in a position to help.
Consumers burned in 2008 have been doing a better job of managing their finances as well, saving money, paying down debt and increasing their credit scores. Americans were also much more careful and prudent about how they spent stimulus checks, mainly using them for everyday items, necessary bills and home improvements. Consumer spending actually fell the most in some of the wealthiest neighborhoods. Analysts speculate that a large percentage of white collar workers stayed home and were able to work remotely. Therefore, they spent less than they would have normally on commuting, work attire and meals. In addition, business and personal travel and entertainment ground to a halt.
Nonbanks Enter Lending Arena
The FDIC approved a final rule that will allow major businesses to seek banking charters without having to meet the capital and liquidity demands that dedicated financial firms must adhere to. Industrial loan charters were originally created to let commercial firms make small loans to workers who were underserved by commercial banks but have now evolved into big-time banking. The ruling means Walmart, Amazon and Facebook could soon be lending out money. Meanwhile bankers have formed an alliance with Democratic lawmakers and consumer groups and asked for a halt in approving new charters until Congress can close the loopholes that give these companies what the banking industry views as an unfair advantage.
Subscription Programs Popular
Gordon Haskett recently surveyed 500 households and was surprised to discover that 30% of respondents had signed up for Walmart+, and nearly 7% of those surveyed were very satisfied, with another 27% satisfied. Same-day grocery delivery was the most-used benefit, good news for Walmart, because it’s an area where Walmart outshines Amazon. Survey respondents who did not have Walmart+ gave having an Amazon Prime subscription as the number one reason why, with more than 36% saying they didn’t need it because of their Prime membership. Another 20% thought it was too expensive, and 7% were waiting for Walmart to add more perks and remove the free-shipping minimum. Analysts noted that the growing number of subscription programs will eventually force consumers to evaluate what they really use and what’s worth the price of the subscription. It also remains to be seen how much store-avoidance behavior that has developed during the pandemic will become the norm after life returns to normal.
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