2022 OutlookFebruary 16th, 2022 by Nathan Hobbs
With or Without Rising Rates, Experts Say Demand for New Homes Will Prevail
By Drew Vass
If you find it difficult to recall the last time your company experienced a “normal” year, you’re not alone. When it comes to construction-related industries, you could argue that the last period of “normal” occurred as much as 15 years ago—prior to the Great Recession. But COVID-19 isn’t entirely to blame for current woes.
“The year 2019 was sort of the last year of the post-Great-Recession normal, but it wasn’t normal,” says Robert Dietz, chief economist for the National Association of Home Builders (NAHB). That’s when we last saw a slow upward trend in production volumes among builders, he says, but even before the pandemic struck, “We were under-built, constrained by a lack of workers and a lack of lots, and we had already begun to sound the alarm on supply chain issues.”
Despite those challenges—and a pandemic—subsequent years served as proof that an under-built housing market, and supply side constraints for housing in general, were enough to keep construction of single-family homes rolling, Dietz says. When the Federal Reserve dropped interest rates and people began using their homes more than ever, due to a pandemic, demand for single-family homes dipped briefly but rebounded to a rate that continues to outpace construction.
In the end, the impacts of COVID-19 have worked to “cool off” the new homes market, Dietz and other experts suggest, but only to what might be considered more sustainable levels. That trend is expected to continue this year. Overall, the amount of construction expected to occur in 2022 won’t be what it was in 2021, says Kim Kennedy, director of forecasting for Dodge Data and Analytics, but there will be slower increases that resemble more long-term trends.
According to NAHB analysts, total housing starts for the single-family market are expected to return to more modest growth patterns, going from around 1,099,000 units in 2021 to 1,110,000 in 2022, then 1,113,000 in 2023.
That’s not to say the market won’t be hot and remain so for the foreseeable future. But 2021 saw a growth rate that was simply unsustainable—nearly 10% in single family starts, to a rate of construction that was nearly 25% higher than 2019, Dietz says. Expectations for 2022 include continued growth, albeit at around a 1% increase. At the same time, the remodeling market is expected to pick up by around 6%.
“I’ve been saying that this upward surge in single family housing is driven by the three M’s,” Kennedy says, “millennials, because they’re of the age when they’re starting to buy their first homes, mortgage rates, because they’ve been at historical lows, and then movement.” There continue to be a lot of people relocating out of central cities to escape density, she says, which has been amplified by the work from home phenomenon.
No Time for Rest
For manufacturers of doors, windows and other building products, a healthy building market is both good and bad news. If you were hoping to take a breather in order to play catch-up, that isn’t likely to happen. While gains in residential construction will be more modest in 2022, they also ensure that demand will continue at a brisk pace. Just as analysts were correct about the ability of backlog in demand to drive housing amid the pandemic, with a market that remains underbuilt by as much as a million homes, in 2022 those shortages all but guarantee more construction projects. Meanwhile, with the average age of existing homes now reaching 39 years, and large amounts of equity surfacing with rising home prices, remodeling projects are expected to continue for the foreseeable future. The size of new and existing homes is also increasing, which could further increase demand for doors and windows. According to third quarter 2021 data from the Census Quarterly Starts and Completions by Purpose and Design and NAHB analysis, since reaching lows amid the Great Recession, the average size of new single-family homes is now 6.2% larger, at 2,518 sq. ft. The same studies also show that a preference for larger homes is also driving demand for additions. As a result, strong growth in home improvement and maintenance expenditures is expected to continue in 2022, according to the Remodeling Futures Program at the Joint Center for Housing Studies of Harvard University’s Leading Indicator of Remodeling Activity (LIRA). “With these tailwinds, annual improvement and repair expenditures by homeowners could reach $400 billion by the third quarter of 2022,” says Abbe Will, associate project director of the Remodeling Futures Program.
For the sake of planning for 2022-23, “What I’ve told builders and remodelers is—go back and look at your business data from late 2018,” Dietz says. “That’s when the Federal Reserve was ratcheting up rates … The other year to look at is 2013.”
Throttling From Supply and Demand
Experts say part of the moderation anticipated for construction in 2022 comes from increased costs and lag times for building materials. While there’s been much talk about lumber, and rightfully so following increases of as much as 111% in recent years, aluminum has at times seen even steeper increases. Those changes, combined with labor shortages and other factors, lead analysts to agree that in 2022 the three biggest challenges include what many call the three P’s: pricing, people and productivity.
“It’s very clear, as we put all of this together, that if not for the challenges, shortages and prices that we’re currently facing, construction activity would be much stronger than it currently is,” says Dodge Construction Network’s chief economist, Richard Branch.
That back-up carries a wave of impacts to the very start of the chain for construction demand: architectural billings. Even though architecture firms reported increasing demand for design services for more than 10 consecutive months in 2021, according to the American Institute of Architects (AIA), labor shortages, supply chain disruptions, spiking inflation—they’re all expected to suppress architectural billings going forward.
Those throttling effects provide some level of insulation for building materials providers who already struggle to keep up with demand but, by that same token, when materials and labor become readily available, experts say a surge is likely to occur in new home starts.
In the meantime, material and labor issues aren’t expected to resolve in 2022, but supply chain issues from clogged ports and shutdowns in manufacturing are expected to ease somewhat, says Gay Cororaton, director of housing and commercial research for the National Association of Realtors (NAR). Kennedy agrees. While prices for materials are expected to remain high, “The second half of 2022 we should see the increases start to soften,” she says.
But even when those factors get sorted out, “We’re still dealing with trucking issues, we’re dealing with port issues,” Branch says. And for this reason, increasing profit margins will require “doing more with less,” he and other experts suggest—including fewer people. By August of last year, there were 10.4 million job openings and nearly 7.7 million people unemployed. Those numbers don’t bode well for construction firms or building product manufacturers. But signs of improvement have surfaced. Job gains slowed in November and the unemployment rate dropped to 4.2%, but the labor force participation rate increased to 61.8%—the highest reading since March 2020.
According to chief Dodge economist Richard Branch, costs for construction starts will rise by 6% in 2022, and that increase is largely due to “the hard construction costs,” Kennedy adds.
At the same time, home prices in general have also skyrocketed under the influence of competition, adding to issues of affordability.
“This is reflected in the 19.5% annual price rise for detached houses, which marks another record-high for the CoreLogic Home Price Index,” says Frank Nothaft, Ph.D., chief economist for CoreLogic. Those changes and a lack of options among resale homes continue to bolster sales for new homes, creating a backlog of demand, says Kelly Mangold, principal for RCLCO Real Estate Consulting in Bethesda, Md.
But price increases may force some buyers out of the new homes market. On average, home prices rose about 17% last year, Cororaton says, to a median price of around $363,000, with around 74% of metro areas seeing double-digit price gains. As a result, prices in the $250,000 range are gone, she says, primarily impacting first-time home buyers, which now make up a smaller portion of sales.
As Omicron spikes in the early part of the year, by now one thing is clear: While demand for building products is expected to remain in step with housing, we’re facing another year of uncertainty, Kennedy says.
“The uncertainty brought about by COVID-19, and now the expanding variants, is still going to be there and I think that’s still going to cause uncertainty for builders and buyers,” she says. “We’re hoping that by late in 2022 things are settling down and we’re returning to our new normal. But it’s still going to be an unsettling year.” At the same time, just as they did in 2020 and 2021, “People will find a way to achieve their own personal American dream,” she adds, driving demand for new homes, remodeling and, as a result, doors and windows.
Drew Vass is editor of [DWM] magazine.
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