We are now entering the eleventh year of our economic and housing recovery, which is the longest in U.S. modern history; an economic cycle normally lasts seven years. On the surface, the economy looks strong with above-expected job growth, low unemployment, wage increases, strong consumer spending, and the stock market hitting new records almost daily.

However, some underlying nagging problems with the economy this year have caused some talk about a recession on the horizon. Manufacturing and non-manufacturing segments are softening, consumer confidence has been declining (especially for future expectations) because of trade issues with China, and gross domestic product growth has been slowing.

During the last several months, the economy and housing have strengthened. In response to the soft underbelly of the economy, the Federal Reserve reduced interest rates by 0.25 percent three times this year, with the anticipated fourth reduction now on hold possibly through all of 2020. The 30-year mortgage interest rate dropped 24 percent from last year’s 4.83 percent to 3.7 percent in November, which is good for housing.

However, the home buyer has not responded as expected. This year, housing has not met expectations. Both single-family building permits and housing starts are only slightly above last year (2.8 percent and 0.6 percent respectively). Until the last several months, 2019 housing activity trailed activity in 2018.

Recommendations for the coming year
So, what about 2020? At this point, moderate growth for housing is being forecast for next year. On the positive side, the home buyer is back and confident with low mortgage rates. We are seeing the emergence of the millennial buyer moving to the suburbs. On the international trade front, the United States–Mexico–Canada Agreement has finally been approved, and Phase One of the trade deal with China has been reached.

Manufacturing and non-manufacturing will improve now that trade issues appear to be resolved. However, news for the year will be dominated by politics since it is an election year. Washington will probably be able to prop up the economy through election day, but some softening of the economy should be expected after the election, no matter which party wins.

I would be conservative on my business planning forecast for 2020, and bracket my most probable forecast with 10 percent above and below forecasts. The business forecast should be reviewed quarterly to determine which of the three is most accurate for your local market. There is too much uncertainty about the economy at this point.

Play the short game when it comes to buying land. You need to maintain about 18 months of finished lots to stay operational, but be very cautious about acquiring any long-term land commitments. Remember, land and land debt are what puts builders out of business. Upper-priced homes have been very soft in most markets, but the demand for lower-priced homes has been strong. Develop smaller, lower base-priced homes for your product mix to cater to the millennial buyer who is now in the market place.

If it is going to be a moderate growth year for your company in terms of homes sold, try working on growing your profits and efficiencies during this time. You will be better equipped to take advantage of the strong growth that is coming for the housing industry as the millennial generation fully enters the housing market and the heart of the baby boomer population downsizes to maintenance-free living.
 

The housing industry has been on fire since the six-week shutdown last year due to the pandemic. New home sales surged 20.4% from the prior year, with the median sales price only increasing 2.9%. This year, new home sales are up 33.7% over the same period in 2020. In April, the median sales price for new homes was up 10.5% over the median sales price for 2020. Builders have been artificially holding back on sales because of huge backlogs, the escalating cost of materials, material and labor availability, and concerns regarding depletions of their developed lot supply.
  
On May 7, lumber futures for May delivery were $1,645 per 1,000 board feet. The year-over-year increase since May of 2020 was 374%. Construction schedules have been disrupted because of exceptionally long lead times for delivery of critical materials such as cabinets, doors, door hardware, and appliances, etc. Some home builders have cut off sales completely, while others have put monthly limitations on sales. Most builders have been aggressively raising prices to cover added construction costs and to slow down sales. April new home sales did experience a drop of 5.9% from the sales rate registered in March.

During 2020, total housing starts increased 6.9% over 2019, with single-family starts up 11.6% and multifamily starts registering a 3.3% loss of activity. Year-to-date total housing starts are up 20.6% over the same period in 2020, with single-family housing starts increasing 28.0% and multifamily starts gaining 5.7%. Total housing starts in April were down 9.5% from March, with a 13.4% drop in single-family starts and a 4.0% increase in multifamily starts. 

Currently, the availability of new or existing housing inventory is virtually non-existent. There were only 2.4 months of existing homes and 4.1 months of new homes for sale in April. Both new and existing housing should have about 6.0 months of inventory available for sales. Existing homes were only on the market for an average of 17 days. Existing home sales have been down for the last three months which could be due to the lack of inventory, rapidly increasing sales prices, or the increase in interest rates. Since both new and existing home sales showed some softening during April, this trend should be watched very closely. This is especially concerning since we are beginning to see strong inflationary pressures in the economy because of all the fiscal stimulus which could lead to a fairly rapid increase in mortgage interest rates and the deteriorating affordability of both new and existing housing because the lack of inventory.

For a better understanding of the housing market over the next 10 years, download my report The Roaring 2020s: Housing’s Best Decade from our website. This decade will be a seller’s market for the home building industry. We may have some bumps in the road, but they will not be due to a lack of demand.

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