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Question #7 for 2022: How much will Residential investment change in 2022? How about housing starts and new home sales in 2022?
Earlier I posted some questions on my blog for next year: Ten Economic Questions for 2022. Some of these questions concern real estate (inventory, house prices, housing credit, housing starts, new home sales), and I’ll post those in the newsletter (others like GDP and employment will be on my blog).
I'm adding some thoughts, and maybe some predictions for each question.
7) Residential Investment: Residential investment (RI) was a slight drag on growth in 2021, because investment was so strong in the 2nd half of 2020. Through November, starts were up 16.3% year-to-date compared to the same period in 2020. New home sales were down 6.5% year-to-date through November. Note: RI is mostly investment in new single-family structures, multifamily structures, home improvement and commissions on existing home sales. How much will RI change in 2022? How about housing starts and new home sales in 2022?
First a graph of RI as a percent of Gross Domestic Product (GDP) through Q3 2021:
Residential investment (RI) decreased at a 7.7% annual rate in Q3. And RI, as percent of GDP, decreased in Q3. We don't have the data yet for Q4 2020 yet, but it appears RI will make a negative contribution to GDP in 2021 - mostly because the 2nd half of 2020 was so strong.
Note that RI as a percent of GDP is at about the average level of the last 50 years.
The second graph shows single-family and multi-family housing starts through November 2021.
Year-to-date, starts are up 16.3% compared to the same period in 2020, and will finish the year around 1.6 million total starts. Starts in 2021 will be the most since 2006 when 1.801 million units were started.
The third graph shows New Home Sales since 1963 through November 2021. The dashed line is the November sales rate.
Sales, year to date in 2021, are 6.5% below sales in 2020, and new home sales in 2021 will finish solidly below sales in 2020 - since sales in 2020 finished strong.
Here is a table showing housing starts and new home sales since 2005. No one should expect an increase to 2005 levels. A key reason new home sales dipped in 2021 was builders were limiting sales due to supply constraints and cost uncertainty.
The next graph shows housing starts under construction, Seasonally Adjusted (SA).
Red is single family units. Currently there are 752 thousand single family units under construction (SA). This is the highest level since March 2007.
For single family, most of these homes are already sold (Census counts sales when contract is signed). The reason there are so many homes is probably due to construction delays. Since most of these are already sold, it is unlikely this is “overbuilding”, or that this will impact prices.
Blue is for 2+ units. Currently there are 734 thousand multi-family units under construction. This is the highest level since July 1974! For multi-family, construction delays are probably also a factor. Combined, there are 1.486 million units under construction. This is the most since 1973.
All of these units under construction will hold back housing starts in 2022.
Most analysts are looking for new home sales to increase in 2022. For example, the NAHB expects new home sales to increase to 840 thousand in 2022, and Fannie Mae expects 897 thousand, and the MBA is forecasting 922 thousand in 2022.
And for housing starts, Fannie Mae is forecasting starts will be mostly unchanged at 1.6 million, and the NAHB is forecasting a decline to 1.55 million.
My guess is starts will be down low-to-mid single digits year-over-year in 2022. New home sales could pick up solidly if existing home inventory stays low, supply issues are resolved, and mortgage rates stay low, but my guess is new home sales will be mostly unchanged year-over-year.
• Question #1 for 2022: How much will the economy grow in 2022?
• Question #2 for 2022: Will the remaining jobs lost in 2020 return in 2022, or will job growth be sluggish?
• Question #3 for 2022: What will the unemployment rate be in December 2022?
• Question #4 for 2022: Will the overall participation rate increase to pre-pandemic levels (63.4% in February 2020)?
• Question #5 for 2022: Will the core inflation rate increase or decrease by December 2022?
• Question #6 for 2022: Will the Fed raise rates in 2022? If so, how many times?
• Question #7 for 2022: How about housing starts and new home sales in 2022?
• Question #8 for 2022: Housing Credit: Will we see easier mortgage lending in 2022?
• Question #9 for 2022: What will happen with house prices in 2022?
• Question #10 for 2022: Will inventory increase as the pandemic subsides, or will inventory decrease further in 2022?