2020 has been a year of surprises, including the rise and fall and rise again of the U.S. housing market. Businesses in the home building industry are looking at their successes this year and wondering if they have just pulled demand forward, or if this year's strength will remain through 2021. The Zonda team analyzed the countervailing forces in housing and provides its forecasts below.
Forecasting has never been easy, but throw in a pandemic, a rocky presidential election, and the potential for a double-dip recession, and you get an even more convoluted picture. The forecasts given today will be subject to change as we learn more information about what COVID-19 will do to the economy in the winter months, review an anticipated new stimulus bill, and see the results from the Senate runoff races in Georgia on Jan. 5.
In the meantime, we have created our forecasts with certain assumptions in mind about the economy and housing market. As we lay them out, remember where we are coming from: Both single-family housing starts and sales reached highs not seen in over a decade this year.
- Our single-family sales forecast calls for 850,000 transactions on an annualized basis, representing a 3.7% growth rate from 2020 to 2021. The last time the housing market was this strong was 2006.
- The risk is to the upside on our sales forecast and we could see a number closer to an annualized 900,000 if builders are able to better match the demand landscape and affordability woes don't stunt growth.
- We are calling for a 12.6% increase in single-family home starts in 2021 over 2020, hitting a 1,075,000 seasonally adjusted annualized rate. The outperformance of starts over sales is partly due to the backlog builders are entering 2021 with.
Our mild forecasts are both commentary on the strength we have seen so far in 2020 as well as the push and pull factors that will continue into next year. The demand side of the new-home market is extremely strong, driven by a variety of tailwinds including favorable demographics, a change in lifestyle due to COVID-19 that has caused the home to become the focal point in our daily lives, low interest rates, and an expanded buyer pool as people relocate or move out of rental communities.
A major consideration in our forecast has been the challenges builders are telling us they are facing going into next year. We asked division presidents of home building companies across the country what their biggest concerns are going forward, and their top three answers (in order) are gapping out/running out of lots, land prices, and new home affordability. In fact, our New Home Lot Supply Index shows lot inventory is down 9% year over year, and we expect that will only get worse in the coming months. All three of these concerns are pull forces that could counterbalance the so far undeterred demand.
As such, we expect the first half of 2021 to reflect this seemingly insatiable demand, with new-home sales figures likely up double digits from 2020. While the sales pace is set to continue to perform at record levels at the beginning of the year, the market will eventually run into a limited supply environment. As we move into the back half of 2021, we will run into unfavorable comps due to 2020’s decade-high figures, as well as the aforementioned supply and affordability problems.
Demographics were great heading into 2020, and this solid backdrop will be with the housing market for years to come. We acknowledge, however, that low inventory, limited lot supply, eventual affordability concerns, and economic risks are push factors that will come even more into play in the next year. Given the amount of uncertainty heading into 2021, we will continue to monitor the housing fundamentals as well as the latest economic developments, especially with the vaccine right around the corner, and will adjust our forecasts accordingly.
Nik Scoolis, senior economic research analyst for Zonda, contributed to this article.