Housing: 2021 To Build on 2020’s Gains

Home prices soared in 2020, as many people sought to relocate from crowded urban neighborhoods to suburbs with more space for parents to work from home and kids to play in the yard. And 2021 is shaping up to be another hot year for housing. After rising 11% in 2020, look for home prices to jump another 7% this year. 

Residential construction took a breather in January. Housing starts fell 6% to 1.58 million annualized units. Still, total starts were 2.8% above a year ago. Single-family starts plummeted 12.2% from the prior month, to their lowest reading since last September. However, a 3.8% gain in single-family building permits points to a stronger performance from builders over the next couple of months. Meanwhile, multifamily starts rose 7.1% in January. Permits for multifamily construction rose 27.2%. Despite the January weakness, home builders’ confidence is still strong.

New-home sales remain strong, rising 4.3% to a seasonally adjusted rate of 923,000. Sales rose in the Midwest, the West and the South, but fell in the Northeast. The inventory of new homes available for sale rose 2.7% in January, with most of the increase coming from homes where construction has not yet started. At just 4.1 months’ worth of demand at the current rate of buying, the supply of new homes for sale is close to all-time lows. The tight inventory will likely weigh on sales as buyers struggle to find suitable properties. New-home prices continue to increase because of strong demand for larger and more expensive homes, with new homes in the $500,000 to $750,000 price range making up a greater share of total sales. Sales should moderate in February and March.

Existing-home sales started the year on an upbeat note, rising 0.6% in January, to a seasonally adjusted rate of 6.69 million. They rose 23.7% from a year ago. Homeowners are reluctant to put their properties on the market, even as demand for homes is high among buyers. On a year-over-year basis, total inventory is down 25.7%. Inventories will likely increase ahead of the spring selling season as higher prices bring out more sellers. There was just a 1.9-month supply of existing homes in January. With inventories so lean, houses that do go on the market are selling quickly. Homes typically remained on the market for 21 days in January 2021, down from 43 days in January 2020.

Home prices continue to soar amid the shortage of inventory. The S&P CoreLogic Case-Shiller National Home Price Index rose 10.4% in December from a year ago. Housing demand will likely moderate over the next few months as affordability continues to decline. The boost in affordability provided by record-low interest rates has been wiped out by the recent increase in house prices. What’s more, mortgage rates are now rising, and will continue to increase in 2021.