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Homebuilding Is Primed for Growth -- Will Coronavirus Change That?

[Updated: Dec 28, 2020 ] Mar 10, 2020 by Deidre Woollard
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A warm and mild winter has meant that construction season may be starting earlier than in years with heavy snowfall and colder temperatures. The most recent forecast from the NAHB/Wells Fargo Housing Market Index released in late February showed that while homebuilder confidence dropped one point to 74, the last three monthly readings all remained at the highest level since 2017.

A combination of solid economic numbers, low interest rates, and low unemployment have kept interest in homebuying strong. One of the major constraints on the market has been supply, which has boosted prices.

Talk to any homebuilder over the last few years and you will hear that they can't seem to hire enough workers. The February employment numbers from the Bureau of Labor Statistics were positive overall but were particularly positive for the construction industry, which added 42,000 jobs in February and 49,000 jobs in January. In 2019 as a whole, construction job gains averaged 13,000 per month. This February alone, over 10,000 jobs were added in the residential building sector.

January housing numbers showed a market primed for expansion

According to the U.S. Census Bureau and the U.S. Department of Housing and Urban Development, housing starts were down 3.6% from December to January. However,

privately owned housing units authorized by building permits in January were at a seasonally adjusted annual rate of 1,551,000, up 9.2% from December and 17.9% from the previous year. Single‐family authorizations in January were up 6.4% from the previous month.

As Liz Brumer noted in a recent article, the impact of the coronavirus is starting to have reverberations throughout the economy. Shipments of some building materials have been slowed as many homebuilding supplies, from wallboard to lighting, are manufactured in China.

With some factories closed for over a month, many builders may need to either put projects on hold or source from other areas, which could end up raising prices. Luxury homebuilder Toll Brothers (NYSE: TOL) recently reported that it paused building on 11 homes in California because of supply delays.

The immediate impact of the Fed's surprise interest rate drop has been that the 30-year fixed-rate mortgage rate has hit new lows. Soon we will see if the interest rate drop provokes a spike in refinancing and new-purchase mortgage applications. Much depends not just on the economic fundamentals but on consumer sentiment and whether concerns about the future cause potential buyers to pause their plans.

Issues of supply and demand remain in play

The bottom line is that new building has trended below household formation for many years. This issue will not fade away even if the economy experiences a downturn. According to data from December 2019, household formation was at a monthly annualized growth rate of 3.69%. Compare this to the average annualized growth rate of 1.48%. Whether these households become buyers or renters remains to be seen.

What may happen is that homebuilders will need to adjust pricing to some extent. Many homebuilders have already begun to pivot their offerings toward the middle of the market by creating homes with a smaller floor plan. This is expected to continue as homebuilders seek to adapt to an ever-shifting market. For the short term at least, there is every indication that builders will keep planning for an active year.

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Deidre Woollard has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.