New housing permits reach 2007 peak, but cooling slightly

New housing permits increased by 14% in 2020, reaching the highest number of building permits issued since 2007. But, it isn’t even a dent in the record housing shortage of at least 5.5 million homes, according to Chief Economist for Windermere Real Estate Matthew Gardner.

Gardner was a featured speaker at the RealTrends Gathering of Eagles, recently held at The Broadmoor Hotel in Colorado Springs.

In fact, nearly 1 million new homes were added to the U.S. market in 2020, primarily in the Texas metro areas of Houston-TheWoodlands-Sugar Land, Dallas-Fort Worth-Arlington, and Austin-Round Rock-Georgetown. Other hot spots included Arizona’s Phoenix-Mesa-Chandler and Georgia’s Atlanta-Sandy Springs-Alpharetta metro areas.

According to the NeighborWho report, the top two contributing factors for this increase were historically low mortgage interest rates due to the pandemic and a desire to move to new locales. However, evidence already shows this upward trend of new home starts has started to ebb, albeit very slightly.

“Basically, what we saw was a decline in the spring of 2020 with a real strong rebound in the second half of 2020,” said Robert Dietz, chief economist for the National Association of Home Builders. “The rate of builders seeking permits and the measure of builder confidence peaked last year in the fourth quarter. Our NAHB/Wells Fargo Housing Market Index (measuring the pulse of the single-family housing market) peaked in November at 90 out of 100. It has since come down to 81, and the reason for that is the higher material costs and the shortage of building materials.” Gardner chooses to count housing starts when the foundation is poured rather than when permits are pulled.

Lumber prices slowly go down

Since reaching an all-time high of $1,515 per 1,000 board feet on May 28, lumber prices are now down 20%, which could alleviate some of those higher material costs. In fact, Dietz said the NAHB expects lumber costs to drop below $1,000, maybe to $750, but reiterates that is still more than twice the lumber costs in April 2020.

Dietz also points out lumber isn’t the only building material in high demand. “95% of builders are reporting shortages of appliances,” he said. “OSB (particle board) prices are up 300% to 400%.” He’s also hearing about shortages of paint, windows and doors.

According to a report released by NAHB in June, overall building permits decreased 3% to a 1.68 million unit annualized rate in May, with a 1.6% decrease in single-family, new housing permits.

“What we’re seeing is a really strong pace of demand,” Dietz said. “Builders built and tried to add to inventory last year, and as those prices went up, there’s been a slight pull back in the intended pace of that homebuilding. We can see that in the permit data, starts data and builder confidence. We think we’re going to kind of cool back to the long-term trend that was in place before the start of 2020.”            

That long-term trend would be construction growth for single-family homes to address the current shortage of homes in the United States. “We also need additional apartment construction, so we expect to see apartment construction to increase,” Dietz says. Because the average age of a single-family home is about 39 years old, Dietz said he also expects to see an increase in remodeling projects.

Long-term challenges

While short-term challenges include material shortages, Dietz said long-term challenges including getting access to land, receiving zoning approvals and addressing the construction industry labor shortage will continue to affect single-family home construction.

“The challenge for the market will be one of housing affordability [because] those existing home prices are up so high, construction material pricing has gone up and the expectation over the next year or two years is that interest rates will move higher as well,” Dietz said.

Although new home pricing didn’t go up as much as existing home prices in 2020—5% versus 12% year over year—new home pricing has accelerated to 20% year over year reflecting the higher building costs, Dietz said.          

“Builders were really disciplined in making sure new homes didn’t get priced out of the market, but, at some point, you have to go up because of those higher costs,” he said. 

Despite those slightly lower permit numbers, Dietz said single-family home construction will remain strong. “We expect to see at least a 10% gain in 2021 in single-family housing starts, which is sustainable to alleviate the housing inventory deficit.”