Demand for housing was one of the areas of growth during the pandemic. It may seem like we might have already reached a peak, but many experts say that this is just the beginning of a ten year boom cycle for home construction!
The housing market has seen a ten year lull in the creation of new homes. Once the housing bubble popped in 2008, excess inventory had to work its way out of the market but then the demand for new homes stayed tepid at best.
Inventories remain near record lows but starts are finally starting to creep up. Starts on new single-family homes have averaged less than 750,000 for the last 10 years. Between 2004 and 2006 average starts were 1.6 million per year; the peak of the housing bubble.
The dynamic that is in play today is that excess demand is not the driving factor in the housing market, but a severe lack of supply.
Housing analyst Stephen Kim at Evercore ISI says:
“The supply shortage built up over 10 years, and it won’t go away quickly.
The industry would need to sustain a two-million-starts pace for a decade to bring the industry out of its current underbuilt situation,” *
Big home builders like Lennar and Toll Brothers are changing their business model in order to avoid another trap like 2008. Instead of using their assets to purchase land for future construction, now they often make deals with land developers to give them options to purchase lots rather holding the land themselves. This allows them to take on less risk and keep more profit on the books.
Demographics are playing a roll in housing demand as well. Millennials who may have taken longer to leave the nest than some generations, are now chomping at the bit to own a home. They have gravitated to the outskirts of urban areas but still face a market that is very challenging for first time home buyers.
Another trend that will be favorable in coming years is the surge in people working from home, or wanting to work from home. Millennial renters want to move into single family housing and Boomer homeowners are looking for larger homes with offices.
Currently low mortgage rates are favorable as well. There are headwinds there that may cause concern for the market. With the inflation of materials and transportation already pushing costs up, the combination of higher home prices and higher interest rates could slow demand.
Dale and Robert Francescon, the co-CEOs of Century Communities, tell Barron’s, “With interest rates still at historic lows, demand has been consistently strong throughout our national footprint of more than 40 markets.”
And a bit of a cool-off may not be such a bad thing for the red-hot housing market, says Larry Pitkowsky, manager of the GoodHaven fund, which owns Lennar shares. “A more normalized pace of demand might be better, as Lennar and its brethren are striving to balance very strong demand with higher raw materials and tight labor markets, and a sensible desire to protect margins,” he says. *