Economic Forecasts

Housing: Residential Construction Recovers from Weather-related Slowdown

Kiplinger’s latest forecast on housing starts and home sales

Housing demand continues to be driven by low mortgage rates, demand for more space during the pandemic, favorable demographics and a large rise in household savings. Demand will slow down from its record pace, but will remain robust in coming months.

Residential construction is rebounding from weather-related weakness. Following winter storms that shut down some construction activity in February, housing starts increased 19.4% to 1.739 million annualized units in March. Total starts are up 37% from a year ago. Single-family starts rose 15.3%, while multifamily surged 30.8%. Home builders’ confidence is still strong, despite record-high lumber prices and supply chain bottlenecks. With solid housing fundamentals and the supply of lumber increasing, housing starts should climb higher in the coming months. Housing completions jumped 16.6% in March — the largest increase since January 2019.

New-home sales remain strong. They jumped 20.7% in March to a seasonally adjusted rate of 1.021 million. Sales rebounded in three of the four Census regions, with the South showing the strongest increase. The inventory of new homes available for sale was little changed from February, with most of the increase coming from homes where construction has not yet started. At just 3.6 months’ worth of current sales, the supply of new homes for sale is near all-time lows. The median price of a new home fell 4.4% in March and is up only 0.8% from a year ago.

Existing-home sales fell for the second consecutive month. Sales fell 3.7% in March, to a seasonally adjusted rate of 6.01 million. Still, existing-home sales are up 12.1% from a year ago. The decline reflects the lingering effects of severe winter weather in parts of the country in February. Sales represent actual closings, which tend to occur between four and six weeks after a purchase contract is signed. There are some signs that inventory may rise in coming months as higher home prices bring out more sellers. The inventory of homes available for sale rose 3.9% in March from the previous month and increased in 19 out of the 50 largest metro areas. On a year-over-year basis, total inventory is down 28.2%. With inventories so lean, homes are selling quickly. Homes typically remained on the market for 18 days in March 2021, down from 29 days in March 2020.

Home prices continue to boom amid a shortage of inventory. The S&P CoreLogic Case-Shiller National Home Price Index rose 12% in February from a year ago. With inventories still very low, house prices have risen steadily since the middle of last year, as surging demand has put upward pressure on home values across the nation. Housing demand will likely moderate over the next few months, as affordability continues to decline and mortgage rates continue to rise. The average 30-year fixed mortgage rate is up about 40 basis points from the start of the year and will continue to climb through 2021.

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