Global business is still recovering from the effects of the pandemic. That uncertainty is reflected in not just the stock market, but the overall economic sentiment. Wild swings in the stock market, coupled with general uncertainty, have made accurately predicting what’s coming more challenging than ever.
This has led to several head-scratching disparities. For instance, the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index jumped 6 points in August, reaching a record 78 on the 100 point scale. Anything above 50 is considered generally positive sentiment, so those numbers portend a strong degree of confidence in the new single-family home and condo construction market. For comparison, the index dropped to just 30 in April at the height of pandemic-related closures.
However, the New York Federal Reserve Bank’s Empire State Manufacturing Survey, taken in August, revealed a second-straight month of dipping optimism among manufacturers in the state.
What’s Driving the Uptick in New Home Construction?
The pandemic has sent shockwaves through just about every sector of the economy. Going forward, the world of work will likely bear only a passing resemblance to what we used to know. A big change that’s already started to play out is the increased prevalence of working from home, which is a lot easier done in a spacious, dedicated home office than cramped in the corner of an apartment.
A recent survey of builders conducted by Myers Research pointed to more defined office space or workstations as by far the biggest increase in demand for new construction, with additional flex space and additional technology in the home rounding out the top 3.
“Consumers are eager to be able to have some kind of quiet space or designated workspace in their home,” Ali Wolf, Myers Research chief economist told the radio program Marketplace.
Historically low interest rates are another factor spurring new home construction, with the average 30-year mortgage interest rate sitting below three percent. As a result, buyers-in-waiting are getting off the sidelines and taking the plunge into homeownership.
Another factor that we might be observing is something of an exodus from dense metro areas. In the wake of a global pandemic, crowded city streets and difficulty maintaining safe social distance have compelled some urban dwellers to pick up and move to the less densely-populated suburbs.
Other Home Features Buyers are Demanding
Another fact of life in our new socially distanced world is that most of us have begun spending a lot more time at home. This doesn’t just mean a desire to spread out a bit more; there is an increase in demand for certain amenities that have gone from nice-to-haves to must-haves over the past six months.
As schools open up, parents are facing some difficult choices. Many of their strategies involve a hybrid approach that includes some in-home virtual learning. Rather than simply having children study at the kitchen table, more buyers are asking for dedicated e-learning spaces that can be easily converted into an effective classroom environment.
Health and safety concerns are also driving new demands from buyers, including better air and water filtration systems, touchless appliances, and even bacteria-resistant paint. Going to the local gym is a great way to stay fit and healthy, but in the age of coronavirus, all of those sweaty bodies close together in a gym seem less appealing. As a result, Myers Research’s survey has also seen a surge in demand for dedicated home gym space.
Potential Obstacles Ahead
It sounds like good news on the surface, but the rosy sentiment among builders could be short-lived depending on the impact the increasing demand will have on the broader construction market.
One area of concern is that the sudden, rapid increase in demand for new construction could send the price of lumber through the roof. Since lumber mills closed during the spring and are still finding their footing after reopening, they will have to really scramble to meet the sharp uptick in demand.
“The demand for new single-family homes continues to be strong, as low interest rates and a focus on the importance of housing has stoked buyer traffic to all-time highs as measured on the HMI,” said NAHB Chairman Chuck Fowke. “However, the V-shaped recovery for housing has produced a staggering increase for lumber prices, which have more than doubled since mid-April. Such cost increases could dampen momentum in the housing market this fall, despite historically low interest rates.”
Even with rock-bottom interest rates and an increased desire for the inherent social distancing of suburbs, the economic recovery is in a fragile state. The positive sentiment around new home construction is a good thing, but exuberance could still prove premature depending on how the coming weeks and months play out.