Economic Forecasts

Housing: Strong Demand Will Keep Boosting Home Prices

Kiplinger’s latest forecast on housing starts and home sales

Home prices will continue to boom amid a shortage of inventory and high demand. The S&P CoreLogic Case-Shiller National Home Price Index rose 11.2% in January from a year ago. With inventories still very low, house prices have risen steadily since the middle of last year due to surging demand. Demand will likely moderate over the next few months as rising prices make homes less affordable for more would-be buyers. The average 30-year fixed mortgage rate is up about 50 basis points from the start of the year and will continue to climb through 2021, also adding to the affordability crunch.

Winter storms and record-high lumber prices took a toll on residential construction when more new houses were badly needed. Monthly housing starts fell 10.3% to 1.58 million annualized units in February. Single-family starts declined 8.5% from January, while multifamily plummeted 15%. Weather also weighed on housing permits, which were down 10.8%. Still, total starts were 2.8% higher than in the same month a year ago. And despite the weakness in the last couple of months, home builder confidence is still strong.

The price of lumber has surged more than 180% since last spring. The National Association of Home Builders estimates that higher prices are adding $24,000 to the cost of building a home. With weather returning to normal and the supply of lumber increasing, housing starts should climb in the coming months.

The median price of a new home continues to increase because of strong demand for larger and more expensive homes, with new homes in the $500,000-$750,000 range making up a greater share of total sales. Sales of new homes dropped 18.2% in February to a seasonally adjusted rate of 775,000. Sales fell in all regions, with the Midwest experiencing the most severe decline. The inventory of new homes available for sale rose 2.6% in February, with most of the increase coming from homes where construction has not yet started. At just 4.8 months’ worth of current sales, the supply of new homes for sale is close to all-time lows. Tight inventory will likely weigh on sales as buyers struggle to find suitable properties on the market.

Existing-home sales have started to come back to earth. They fell 6.6% in February, to a seasonally adjusted rate of 6.22 million. Still, they were 9.1% higher than in February 2020. Many homeowners remain reluctant to put their properties on the market, even as high demand pushes up prices. On a year-over-year basis, total inventory is down 30%. There was just a two-month supply of existing homes for sale in February. With inventories so lean, homes that do hit the market are selling quickly. They typically remained on the market for just 20 days in February, down from 36 days a year earlier.

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