A Housing Upturn as Concerns Grow for Lumber, Material Costs

The remarkably strong data for home construction has continued in recent weeks. The NAHB/Wells Fargo Housing Market Index (HMI), a measure of single-family builder sentiment, returned to its pre-recession level of 72, up from a low of 30 in the spring. The quick advance of the HMI over the course of the summer is a strong indicator of an acceleration of single-family construction, which is required to meet ongoing solid demand for housing.
 
The annualized pace of single-family permits increased 12% in June, according to Census/HUD data. While single-family starts are down for 2020 due to government-imposed lockdowns and the economic fallout of the COVID-19 crisis, the decline is smaller than what was forecast. Single-family starts are down just 1.3% compared to the first half of 2019. However, this small decline is partly due to weak construction data at the start of 2019. Nonetheless, soft production levels in the spring stemming from the pandemic have left the total number of single-family homes currently under construction near a three-year low of 497,000 homes.
 
While single-family construction data have come in strong, multifamily permits are down 14% thus far in 2020 for properties with five or more units, with additional weakness expected due to concerns over future rent payments. In contrast, the remodeling market is weathering the storm well. In fact, the NAHB Remodeling Market Index (RMI) registered a score of 73 for the second quarter, reflecting positive market sentiment in the home improvement sector due to a growing focus on the importance of home for most families as a place to live, work and study.
 
As we have been forecasting since March, housing should be a bright spot for the economy, particularly given historically low interest rates and the increase in housing demand for low density communities. However, risks remain: At the macroeconomic level, layoffs continue to be elevated, with 1.3 milion new job losses reported for the week ending on July 4. And ongoing, continuing jobless claims imply an unemployment rate of approximately 13%.
 
For builders, access issues and delivery delays for building materials are increasingly yielding higher prices. In particular, lumber prices continue to climb, reaching an average price of more than $550 per thousand board feet in mid-July — the highest since the tariff-induced runup of prices in 2018. While sawmill employment increased in late spring in the U.S., a resolution of the U.S.-Canadian softwood lumber dispute would more significantly boost housing, and in turn, the overall economy.
–NAHB Chief Economist Robert Dietz