At the International Builders’ Show in Orlando, economists said the industry has too few laborers, and interest rate and price increases will deter more buyers.

ORLANDO, Fla. – Low existing home inventory and strong buyer demand will keep housing moving forward in 2022, according to economists attending the International Builders’ Show being held in Orlando this week.

However, they also issued a warning: Builders will continue to grapple with building material production bottlenecks and labor shortages that limit the pace of construction and keep upward pressure on home prices.

“Building material costs are up 21% compared to a year ago,” says NAHB Chief Economist Robert Dietz. “Their price and availability, along with persistent supply chain bottlenecks, remains the most urgent challenge for builders as they seek to boost production to meet rising demand.”

Builders say they have “persistent labor shortages,” and a December government report found more than 300,000 job openings in the construction industry. NAHB estimates that the residential construction sector needs to add 740,000 workers a year just to keep pace with the industry’s growth, retirements and departures.

On the interest rate front, inflation continues to run above the Federal Reserve’s 2% target rate and the Fed has signaled it will begin tightening monetary policy in March, which will likely put upward pressure on mortgage rates. NAHB expects the Fed to raise interest rates by 25 basis points four times this year, with the average 30-year fixed rate mortgage averaging 4% by the end of 2022.

“Higher mortgage rates combined with rising construction costs and a lack of construction workers will increase affordability headwinds in the year ahead,” says Dietz.

NAHB 2022 forecast: Robert Dietz

NAHB anticipates modest single-family construction growth in the year ahead. Single-family starts should increase 1.0% in 2022 to 1.13 million units and edge 1% lower in 2023 to a 1.12 million rate.

“While single-family growth slows in 2022 and 2023 and returns to a long-term trend, production will still be 26% higher than in 2019,” Dietz says.

• Multifamily starts, fueled by low vacancies and rising rents, should rise 6.3% from 2021 starts to about 496,000 units.
• Boosted by stronger multifamily growth, overall housing production is expected to rise 2.5% this year to a 1.63 million annual pace.
• Sales of new single-family homes are projected to total 830,000 in 2022, up 9.3% from last year.
• Residential remodeling activity is expected to increase 6% following a growth rate of 10% in 2021 as people continue to use their home for more purposes such as offices, schools and gyms. The surge in home equity has enabled more homeowners to finance remodeling projects that meet their needs.

Build where the buyers are: Frank Nothaft

Frank Nothaft, chief economist at CoreLogic, says new homes are needed where population growth is highest. In addition to Florida, he says those states with the highest net population growth between 2020 and 2021 also include Texas, North Carolina, Arizona and Georgia. The states with the highest net growth rate on percentage basis were Idaho, Utah, Montana, Arizona and South Carolina.

“Population growth in the South and Mountain West will drive new-home demand,” said Nothaft. “Texas and Florida top the list and are the only two states to register a six-figure gain in population growth between 2020 and 2021, at 310,000 and 211,000, respectively. The top five metro markets in terms of new home sales during this period were Dallas, Houston, Atlanta, Phoenix and Austin.”

Between 2021 and 2030, Nothaft said the largest population growth is forecast in the Mountain West, Southeast and Texas.

For the critical entry-level and first-time homebuyer market, Nothaft said that the states with the highest increase in population by 2030 for those between 20-to-29 years of age will be Idaho (15%), Utah (10%), Florida (9%), Arizona (8%), and Texas (8%).

Healing supply chains: David Berson

While building material prices rose sharply over the past year, David Berson, senior vice president and chief economist at Nationwide Insurance, said that improvements to the supply chain should happen in tandem with solid job and income gains to propel growth over the middle of the year.

“As supply chains heal, inflation should decelerate, but is likely to remain above-trend into 2023 as prior expansionary monetary policy continues to push services prices upward,” Berson said in his Monthly Economic Dashboard released on Jan. 28. “Fed tightening will eventually slow growth, but not until next year and beyond.”

Berson noted that home prices continue to rise, with the S&P CoreLogic Case-Shiller U.S. National Home Price Index posting an 18.8% annual gain in November 2021.

“Strong demand, lack of supply and rising production costs are all acting to push house prices up at unsustainable rates,” he says. “Rapid gains in prices and rents last year suggest that OER (owner’s equivalent rent, which measures how much more money a property owner would have to pay in rent to be equivalent to their cost of ownership) will climb this year – keeping the CPI from falling back to pre-Covid rates.”

How high will home prices rise in 2022?

The economists at the NAHB show differed on how the question on how high home prices will rise in 2022.

“We expect that in the next 12 months home prices will rise about 3.5%,” says Nothaft. “Demand should moderate because of affordability concerns – prices are up and mortgage rates are up.”

“The fact that home prices were up nearly 20% this year shows how much demand there is,” adds Berson. “There will be excess demand for housing, at least for now, and we think home prices will rise between 9-10% this year, which would be half the pace of last year.”

Dietz said NAHB’s forecast is for home prices to rise about 5% in 2022.

 

 

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