Q1 Analysis from NAHB: GDP and Interest Rate Predictions

April 27, 2021

Now that the first quarter of 2021 is behind us and more than 25% of American adults are fully vaccinated, the National Association of Home Builders anticipates accelerated economic growth for the rest of the year.

“We expect more growth, increased housing activity, and by July, most of the U.S. economy will be fully reopened,” said Rob Dietz, chief economist for NAHB, during the recent IBSx Spring Update Session: The 2021 Housing & Economic Outlook. “All this accelerated growth means there will be more demand for capital and interest rates are likely to move higher as the year progresses and into 2022.”

Dietz predicts GDP to increase by 6% in 2021, although he pointed out that some economists have even higher growth predictions of as much as 8%. He anticipates the fastest rate of growth since 1984 in 2021, with a slightly slower rate of growth in 2022 and 2023. The U.S. GDP decline of 3.5% was significantly lower than declines in peer countries such as the U.K., France, Canada and Germany, which Dietz said will benefit the U.S. in 2021.

Trends Impacting Multifamily Investment

Several economic trends impact demand and supply in the multifamily market, including:

  • Employment. While more than four million Americans have been unemployed for six months or more, the unemployment rate continues to inch closer to the pre-pandemic rate, said Dietz. One challenge is that labor force participation, which was at 63% before the pandemic, is stalled at 62% in part because some parents must stay home while schools remain closed.
  • Inflation. The Federal Reserve anticipates that inflationary pressure is a temporary side effect from the rapid reopening of the economy. Dietz believes as ongoing global supply chain issues get resolved, prices will ease.
  • Household balance sheets. Despite the impact of the pandemic in 2020, overall personal income rose in 2020 due to stimulus funds, additional unemployment benefits and continued employment for many people. At the same time, personal consumption declined, and many households have more money to spend in 2021.
  • Interest rates. Dietz anticipates mortgage rates may rise above 4% in 2022, which could mean a possible slowdown in the housing market. So far, low mortgage rates have offset rising single-family home prices, but increased rates will impact affordability and possibly reduce buyer demand. For multifamily owners and operators, that could mean higher renter demand in 2022.

Construction Updates

Builder confidence remains high, in part because of the estimated shortage of between one and four million single-family homes. Dietz anticipates that single-family home starts, currently estimated a 1.058 million in 2021, will be revised up to more than 1.1 million.

“We thought multifamily construction would be slow in 2021, but based on the first quarter, we’re upgrading our forecast and looking forward to a strong year,” said Dietz. “We’re anticipating up to 400,000 new multifamily units to be completed each year over the next few years.”

Some construction headwinds include the ongoing labor shortage, which drives wages higher, and the lumber shortage because of a lack of sawmill production in the U.S. and an ongoing dispute with Canada that is keeping import levels low.

Increased lumber prices, which rose 200% from April 2020 to April 2021, add significantly to the cost of construction. Dietz estimates that higher lumber prices add $24,000 to the cost to build a typical new single-family home and $9,000 for a typical apartment.

Rental Housing Demand

Working from home during the pandemic shifted housing demand away from urban cores to suburban and sometimes exurban locations because of the elimination of commuting concerns. Dietz anticipates that 30% to 40% of workers will have a “3-2-2” workweek, with three days in the office, two working at home and two weekend days. That pattern could increase demand for housing closer to urban areas for those working frequently or even daily in an office.

Interest in single-family homes built-for-rent is increasing, said Dietz, with lots of capital flowing to that type of project. The share of single-family homes built specifically for rental purposes, which was about 3.78% in 2015, was 4.47% in 2020 and Dietz anticipates it could grow to a larger share, particularly in high-cost housing markets where would-be buyers are priced out of the market.

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