COVID Spurs Demand for New Vacation Homes

By Yelena Maleyev, economist, Grant Thornton

Housing starts, known as new home construction, came in at a seasonally adjusted annual rate of 1.42 million in September, a 1.9% increase from last month’s revised numbers. Single-family starts drove the gains that hit over one million units for the second month in a row; multifamily starts fell for the second consecutive month. Housing supply remains constrained as first-time and vacation home buyers continue to flood the market. Some builders in vacation home markets say they are taking orders into 2022.

New single-family homes, at a seasonally adjusted annual rate of 1.1 million in September, are on track for the largest gains since the housing bubble burst. All regions except the Midwest posted gains in single-family starts. Building in the Midwest was exceptionally strong over the summer but has since wound down. The Midwest is now grappling with another wave of COVID but it is too early to tell if that is what is holding back construction this fall.

Multifamily starts for five or more units came in at 295,000, the lowest since the lockdowns in the spring. Most of those losses occurred in the Midwest and the South. There is still a shortage of affordable, multifamily units across the country; higher-end rentals in large city centers are plentiful. Many owners are offering free months of rent and extra incentives to lure renters.

We will be watching multifamily housing closely when 2021 begins and eviction moratoriums lapse. An analysis of Census numbers suggests there is currently a $14 billion shortfall in rents paid across the U.S.; that could double by the start of 2021 if more stimulus isn’t approved by Congress soon. Landlords, many of whom are small businesses that own fewer than 10 units, are still on the hook for their mortgages, taxes and insurance payments. The risk is that mortgage defaults and evictions rise as we move into next year.

Permits, an indicator of future home building activity, came in at a seasonally adjusted annual rate of 1.55 million in the month. Permits haven’t been this strong since 2007 when the housing market was coming down from a bubble high of 2.3 million in 2005. Home builder sentiment, as measured by the National Association of Home Builders, hit the highest level on record this month.

Builder confidence slipped in the South, the largest and most important market for new construction. Lumber prices are still higher than the spring but have come down from a peak in August. Builders are still having trouble finding enough skilled workers during the pandemic. As home sales outpace construction, building times continue to increase.

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