Strong Housing Market Ahead

Looking out over the next three years of housing starts, John Burns Real Estate Consulting (JBREC) is predicting a slight decline in housing starts from the recent 1.25 million average, with a rebound in starts post 2021. 

According to projections by JBREC, total housing starts are projected to finish 2018 around 1.28 million and increase to 1.29 million in 2019. By 2020, total projections drop to 1.25 million and then down to 1.15 million single and multifamily starts in 2021. The forecast indicates multifamily is going to decline starting in 2020 showing where there will be 50,000 fewer starts than 2018 figures. The predicted decline continues into 2021 where multifamily projections are 280,000, a 34 percent drop from 374,000 units in 2018. 

John Herring, CEO of A-1 Roof Trusses in Fort Pierce, Florida, says some component manufacturers (CMs) will need to be ready to make slight adjustments, others won’t likely see much of a change at all. 

“We know there’s going to be a little pullback and you just have to be ready to adjust,” he said. “There is always a little trepidation, a little caution, and having the ability to be flexible is the main thing. We are always looking five years out as far as what’s going to happen between now and then and what’s our plan going forward.”

Much of what will contribute to the lull in permits and starts are higher home prices, a national shortage of construction labor, and the types of homes that are selling. Rising costs of materials, labor, land, borrowing rates, and regulation make traditional housing types too expensive. According to JBREC, a home-size adjustment will be needed to meet market demand where the price has to reflect the ability to pay the mortgage.

The same holds true for multifamily: What is the rent level that will provide occupancies that make new projects profitable?  

Todd Tomalak, Vice President of JBREC, tells CMs they should “analyze your geography thoughtfully – growth opportunity is definitely there, but you need to look at secondary markets (which builders are starting to do).”

The high costs of homebuilding, plus the shortage of new homes, is allowing builders to continue to increase new home prices. 

The number of entry-level homes has declined, with many being built today as move-up homes. The average 1,700 sq. ft. home that is now considered to be an entry-level home is priced around $240,000, with a move-up home of 2,400 sq. ft. priced at $350,000. 

“Affordability challenges are causing builders to pause and look closely at their growth and costs by region,” Todd said. “‘Value added’ services are more relevant now than prior cycles, as labor shortages in construction look to be permanent.”

While affordability will be a big challenge for the housing industry in the next few years, there is light at the end of a relatively short tunnel. “We are very positive post 2021,” he said. “Demographics and a decade of underbuilding support strong growth in construction after a mild ‘hiccup’ in affordability.”