5 min and 30 second read
Recently, the Tampa Bay Builders Association hosted a webinar centered around the 2021 economic forecast. I’ve watched the entire webinar and am here today to inform you of what you need to know for the economic future of home building and development. Continue reading to learn how you’ll be impacted by the economic climate of the country and more about the 2021 economic forecast for home builders.
According to Brent Schutte, CFA and Chief Investment Strategist for Northwestern Mutual, the market events and economy are on different time horizons rather than being disconnected. In other words, he asserts that the market is a discounting mechanism of not just what is happening today, but what’s going to happen in the future.
In other words, a discounting mechanism means that the stock market takes into consideration all available information including present and potential future events. When unexpected events occur, the market discounts this new information very rapidly.
That might explain why there’s a perceived disconnect between the market and the economy. While there’s disappointing economic news, the market moves higher and higher. Fortunately, the market is painting the picture that 2021 will be much brighter than 2020 economically. America’s economy has adapted to COVID-19 and here’s why.
The United States is forecasting a fiscal stimulus and with more expected to come. This helps build the bridge to bring those individuals back from being impacted financially from COVID-19. In the broad picture, the US and global economy are operating on all cylinders of growth for the first time since 2017. Schutte expects to see a 5-6% economic growth in 2021 and into 2022.
The economy is adapting because, even with the increase in COVID-19 cases, the number of industries reporting growth has only fallen back by one major sector. The only businesses primarily impacted are the accommodation services such as hotels, restaurants, along with entertainment and recreation, as one would imagine.
As many fail to understand, a narrow economy did exist pre-COVID-19. For example, at the end of 2019, only 14 industries reported they were positive in growth. When COVID hit, technology companies weren’t impacted. “It was actually more of a tailwind from all of us doing the things we are doing today”, states Schutte.
As a country, we were able to quickly pull together the largest non-war stimulus program in history. Sitting right at $2.2 trillion, it might even jump higher. President Biden is proposing another 2 billion on top of that. While he might not get all of it, he might receive more than expected.
Schutte continued to share that in 2020, economic growth fell but personal income didn’t (in aggregate). This is because of the very large stimulus packages, the continuing of the stimulus, and people coming back to work because the economy has adapted. With consumer savings sitting at approximately 12%, we are entering into 2021 with good footing as a whole and expect to see large consumer spending.
Recent research suggests that the housing market still remains very affordable. Plus, the US banking system remains healthy, despite the pandemic. What does this mean for you? It means lending should begin to ease as you move into the year and renting vs. owning is consistent as it has been over the past 25 years.
There is some level of pent up demand from being isolated and quarantined during the pandemic. As I noted earlier, expect to see large consumer spending during this year and next for home builders.
Schutte emphasizes that the US is still a divided government despite the Democrats having all three chambers. The control is slim, making aggressive, progressive tax increases at the end of the year unlikely. This is partly due to Democrats being elected in traditionally conservative states. Government is simply only one variable, amongst many others in your investing outlook.
In addition, the Federal Reserve has set its credibility to getting inflation above 2%. “They (The Federal Reserve) want to do everything they can to let it run over 2% inflation and let the economy run hot. They won’t hike rates any time before we get there,” explains Schutte.
Basically, they used to hike rates gradually on the path to 2% so they made the cost of debt more expensive. The Federal Reserve now is promising to not do anything dramatic. There will not be a rate hike until sometime after inflation has averaged 2% for a sustained period.
To give you more information, the Federal Reserve impacts the economy through the stock market. In fact, one of the Federal Reserve’s goals is to get consumers to take financial risks. All and all, rates will remain somewhat low and financing should remain fairly conducive. A broader, faster economic growth means the stock market will rise in 2021.
According to Lesley Deutch, Managing Principal for John Burns Real Estate Consulting & Research Firm, there’s a very bullish outlook for 2021. She predicts strong housing demand just like 2020 ,coming from primarily homebuyers, investors, and rental households.
While supply is low, there’s increasing optimism for the future as the country slowly returns to normal with the circulation of the vaccine. Deutch explains there’s a strong home price appreciation, with an 8% increase in resale price appreciation and a 9% increase in new home price appreciation (net of incentives).
Not only is there an increase in price appreciation, but there’s also an increase in home sales and single-family construction volumes. For instance, Deutch says there’s a 7% increase for new home sales, a 9% increase for single-family permits/starts, and a whopping 15% increase for resale sales.
While single-family housing increases, multi-family housing decreases. There has been a 33% decrease in multi-family permits and a 36% decrease in multi-family starts. She predicts that there’ll be a 2.9% mortgage rate through 2021, which is incredibly low based on the bond market.
Consumer preferences have shifted as well. There’s a continued trend of working from home, which is not going away anytime soon. In fact, 9 million more people (on top of those already working from home) will work from home at least one day of the year after COVID-19 is behind us. Plus, there is an increased interest in bigger homes, where you buy, etc. beyond just urban areas.
As a home builder or developer in the US, you should consider creating more work from home spaces in your homes. Along with an increased number of employees working from home, there’s also an upswing of multi-generational living situations. Adult children are moving back home with their families or parents are moving in with their adult children for extra care.
You should consider adapting to these consumer trends by adding kitchenettes to guest bedrooms or in-law suites and possibly having two master bedrooms. At least give your customers the option to easily add these trending features down the road.
Lastly, another big trend right now in the home building industry is the increase desire for outdoor living areas. Outdoor living has always been popular, but not as nearly as it’s expected to be over the near future. This includes creating outdoor living quarters for the home and within the community. Incorporating more outdoor living areas is truly a competitive advantage that consumers will be seeking more and more.
Do you have any questions about 2021 economic forecast for home builders? I know that was a lot to take in. So, let me know if you have any questions about the economic forecast or future. Feel free to leave a comment or a question below. How is your home building or development business doing in comparison to this forecast? Share with us your insights below as well.
About Terry Zelen
Creative Director | Consultant | Author | President of Zelen Communications
Terry Zelen is a seasoned Creative Director with more than 35 years of experience in Home Builder advertising and marketing.
He is the founder of The Punch List, which is an online blog to help inform home builders and developers on strategic marketing insights to fuel their firm.
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