Supply Side Tempers 2021 Housing Outlook

U.S. housing starts rose in December much more than expected to an annual rate of 1.669 million. It's now at the highest level since the financial crisis of 2007–2008. However, the recent surveys of home builders and experts suggest supply constraints are weighing on the outlook for the housing market this year.

Material Costs Are Up, Inventory Is Down

The cost of building materials for residential construction (excluding energy) in the U.S. increased 5.4% in 2020 as the real estate market heated up and lumber prices soared to historic highs during the pandemic.

The continued rising price of materials and land is weighing on home builder confidence since it impacts inventory and affordability. The monthly NAHB/Wells Fargo Housing Market Index (HMI) reading dropped three points to 83 in January from 86 in December. The survey gauges builder sentiment on present and near-term market conditions for single-family homes. It still remains elevated having reached a record high of 90 in November.

"While housing continues to help lead the economy forward, limited inventory is constraining more robust growth," said NAHB Chief Economist Robert Dietz. "A shortage of buildable lots is making it difficult to meet strong demand and rising material prices are far outpacing increases in home prices, which in turn is harming housing affordability."

Builders are also reporting labor shortages, which delay delivery times and put upward pressure on home prices. U.S. home prices rose at the fastest pace in over six years in October 2020, according to the S&P CoreLogic Case-Shiller 20-city home price index. "Despite robust housing demand and low mortgage rates, buyers are facing a dearth of new homes on the market, which is exacerbating affordability problems," said Dietz.

There are just 389,000 single family homes on the market, according to Altos Research, which added that "many new listings are getting offers so quickly they're bypassing our active market data and just going straight to pending-contract." This figure is down from close to 740,000 the same time last year.

Hottest Housing Markets in 2021

A Zillow survey of experts indicates the hottest housing market this year will be the new tech hub Austin, Texas. According to the online real estate marketplace, an overwhelming 84% of those surveyed said Austin values would outperform the national average, compared to just 9% who believe it would fare worse. Page views on Zillow for-sale listings in Austin by out-of-town searchers were up 87% in November compared to 2019.

Phoenix came in second most likely to outperform the nation in home value growth with 69%, followed by Nashville (67%), Tampa (60%), and Denver (56%). Expensive coastal markets New York, San Francisco and Los Angeles are most likely to underperform, though Zillow expects growth in every market.

Notably, 29% of the panelists cited tight supply conditions and affordability concerns as the greatest potential headwinds for the U.S. housing market this year.

The hot housing market was a boon for housing stocks in the past six months. Toll Brothers, KB Homes and The Pulte Group all outperformed the S&P 500 as low interest rates and a migration out of some major cities spurred demand.