After months of competing over record-low inventory, August’s solid home building report is a welcome sign for homebuyers.
The number of housing permits rose 6% from July to August, on a seasonally adjusted annual rate, reaching a four-month high, according to new residential construction data from the U.S. Census Bureau.
Despite pandemic-related hurdles in acquiring labor, land, and building materials, home building is slowly picking up the pace. That’s a good sign for the near future with these challenges in place, and the mid- and long-term as these wrinkles smooth out.
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How home building affects homebuyers
Inventory has a substantial effect on home prices, and home builders are key in bringing new inventory online.
Three forces are weighing on housing supply.
- A decade of underbuilding following the 2008 housing market crash
- Pandemic-driven demand for single-family homes
- Lowest-ever mortgage rates
These factors and others sank housing inventory to record lows in 2021, which sent home prices skyrocketing to record highs.
That leaves home builders with quite a hole to build out of.
According to Redfin, a national real estate brokerage, the U.S. housing market had a 1.1 months supply of inventory in June. Six months is considered balanced.
But things are turning around. The number of homes on which construction started increased 3.9% from July to August, to a seasonally adjusted annual rate above 1.6 million units. Prior to 2020, housing starts hadn’t been above 1.6 million since 2006.
Additionally, demand will likely decrease in the near term due to seasonality and interest rate hikes, giving builders a chance to catch up. But it’s going to take several strong years of home building to replenish supply to a point that it puts substantial downward pressure on home prices.
Housing demand is expected to increase steadily over the next decade due to a wave of millennials aging into their prime homebuying years. And millennials aren’t just competing against themselves over a limited supply of starter homes. Aging boomers looking to downsize may be shopping for the same homes, and coming to the table with more cash and credit.
Unless home builders are able to increase supply to meet demand, home prices will continue to increase.
While residential construction overall had a better August than July, a dip in single-family home building permit authorizations over the spring and summer may lead to fewer completions in early 2022.
According to Census Bureau data, it takes on average one month to start building a single-family home after a permit has been authorized. In 2020, it took on average 6.8 months for the construction period, not including permits.
Based on 2020 averages, it takes nearly 8 months to build a single-family home from permit authorization to completion. It likely takes longer in 2021 due to supply chain disruptions and labor shortages.
In the graph below, the uptick in single-family homes completed in August is likely the result of elevation January permits.
If that’s an accurate correlation, construction in 2022 may lag, since permits fell by roughly 200,000 from January to August.
Given the average eight-month construction time, it’s reasonable to expect single-family home completions to decrease heading into next year’s prime homebuying months. But that disturbance will likely be short-lived.
Permit authorizations are well above pre-pandemic levels. 2021 could be the first year to maintain an annual rate above 1 million permits authorized since 2006.
Some references sourced within this article have not been prepared by Fairway and are distributed for educational purposes only. The information is not guaranteed to be accurate and may not entirely represent the opinions of Fairway.