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Home-builder sentiment hits record for third straight months

The National Association of Home Builders reported a new record high for their Housing Market Index, at 85. This exceeds last month’s all-time record high of 83, marking the third straight month of record highs. Zillow Economist Jeff Tucker joins The Final Round panel to discuss why home-builder sentiment has skyrocketed.

Video Transcript

SEANA SMITH: One of the most resilient areas of the economy, especially during this economic downturn that we've seen over the last couple of months. What did you think of today's report, just in terms of getting another record for the housing market?

JEFF TUCKER: Yeah, this report makes a lot of sense. Builders are confident because they have really good reason to be. This is a great time to be selling homes. And it's a terrible time to be buying homes, frankly. You are going to be running into incredible competition among other buyers out there, motivated by record low mortgage rates.

But the great news for sellers is that they have very little competition. So inventory of existing for sale homes out there is down 36% from this time last year. That means that a lot of home shoppers are just getting frustrated on the resale market.

And they are excited to turn to builders right now. They're excited to get a little relief from that two-week window of buying a home. That's something builders can offer. Builders can also offer a home that hasn't been lived in. And that just feels safer in this environment.

SEANA SMITH: Jeff, how long can this momentum rise? Just because the price is continuing to climb. People are being priced out of the housing market. Is this momentum that you think can last? Or when is supply going to meet demand?

JEFF TUCKER: It's certainly going to last for the next several months. It took several months to dig such a deep trough of an inventory shortage. It took a lot of time to get to this 36% year over year drop in inventory. So it'll take awhile to rebound from that.

And part of the question here is, how much is a temporary factor maybe from, you know, some folks in forbearance are kind of just hunkered down and sort of frozen out of the overall housing market, and how much maybe kind of permanent shifts where, say, older folks, I think, are just more hesitant to move into assisted living facilities now? They're kind of putting that off a few more years.

That's creating this big demographic crunch where we've got all the baby boomers, and now all these millennials, trying to be homeowners at the same time. There's just not enough homes to go around. That's really good news for the only people providing net new supply in the market, which is homebuilders.

AKIKO FUJITA: And, Jeff, adding to those concerns is the price of lumber. We've been talking about that for several months now, especially given the tight inventory, how much that price could spike up prices even further for those who are in the market. What's your outlook on that front? Have we seen the peak there?

JEFF TUCKER: I think we may have seen the peak for lumber. It's been fairly volatile. I think the important thing for builders is they still have a lot of room to actually pass those cost increases on. I think one indication of that is that just recently, we saw the median resale price of-- so the median price of resale homes actually exceed the median price of newly built homes. And that's a very rare phenomenon.

It means that this existing home market has these insane price gains running out so far ahead that builders actually have a lot of room in the pricing game to pass on the cost of lumber. I think sort of the best news for builders is that up over the last several years, one of their biggest challenges was finding buildable lots in places people wanted to live. They could find plenty of buildable land out at the edge of the metro area, but everyone was worried about these long, long commutes.

Suddenly, that's been kind of flipped on its head. People are happy to be that far out. A lot of people are working from home. And so, suddenly, this big constraint of finding buildable lots where people actually want to live has really turned in builders' favor.

ANDY SERWER: Hey, Jeff, sort of adding onto that point, what about labor to build homes? I mean, on the one hand, you hear about high unemployment rates. On the other hand, I talked to builders, and they can't find people to work because it's a skill, right? How's that playing out?

JEFF TUCKER: It absolutely is a skill. And it's, unfortunately, a skill that our economy has lost a lot of. We saw a lot of builders, a lot of subcontractors, hang up their hammers and nails at the end of the last housing cycle, during the Great Recession, this tremendous outflow of labor.

And it's hard to find people. If you put me up on a roof, I wouldn't know how to install shingles. It's hard to find people with those skills. It's possibly a little silver lining here that with such high unemployment, that could motivate a lot of people to try their hand at it, to try coming into the trade and joining the industry right now.

SEANA SMITH: Jeff, what about where home builders are building? Because in the past, there was obviously a huge demand. You wanted to be very close to a city because you were working five days a week.

Now with this whole work-from-home environment, a lot of people are going to shift their behavior. They're not going to be heading into the office five days a week. They might only be going in two or three times. Does that, then, really expand just in terms of the regions and the areas where they're seeing the most demand right now?

JEFF TUCKER: I think that is helping kind of spread the demand around. It's helping ease this crunch of everyone just trying to cram in within a decent commute of some of these mega cities that have driven a lot of employment growth in the last decade. The work from anywhere option is really kind of expanding folks' horizons.

And, you know, I think, in some ways, the story is a little overblown. It's not that every city is just emptying out. But it really is the case that there are a lot of people who are paying through the nose to be renting in the core of these cities, a lot of people in that 30 to 35 age range right now who will now be a lot more willing to go ahead and buy that first home, even if it is kind of way out on the edge of town.

SEANA SMITH: Jeff, there's still, though, a lot of people being priced out of the market, like I said earlier. What are we going to-- I mean, what does that do to the renters' market? Are we going to see the number of renters significantly climb? And how do you think COVID is playing into that?

JEFF TUCKER: You know, the rental market is kind of under these contradictory forces right now, where a lot of folks are making that jump to buy their first home. As you mentioned, a lot of people are priced out. These rapid rises in resale price are making it unattainable, even if mortgage rates help a bit on the monthly payment. People-- there's not that many people who can afford the down payment at the moment.

On the flipside, we saw a lot of young folks, you know, around age 20 move back home during the pandemic. And that hasn't gone back to normal levels. There are kind of echoes there of what happened to the millennials at the end of the Great Recession, kind of this failure to launch, a whole lot of folks living with their parents.

So, in fact, as far as I can tell, there's a lot of reasons for headwinds in rental demand. Both of those forces are combining to kind of diminish the demand for rentals at the moment. That's why we're seeing rents decline, especially in major cities like New York City. It's unclear how far that trend will go, but landlords are clearly having to work to fill vacant units right now.

SEANA SMITH: And Jeff, just looking out into next year when this national moratorium on evictions expires, how much pressure do you expect this to put on the housing market, meaning, do you think it will significantly weaken the housing market?

JEFF TUCKER: Yeah, there's a couple forces here. So there's a national eviction on moratoriums. And then, especially in the owner occupied market, a lot of the pain of the recession was kind of put on hold, thanks to forbearance. So there are still about 3 million homeowners in forbearance on their mortgages. And that will run out in March, April, May next year.

So I think that's one of the biggest unanswered questions is, will we still have 1 million or 2 million homeowners unable to pay the bills when that forbearance expires? If so, that could really turn the tables on this inventory shortage. I don't think we'll see a wave of foreclosures because people have the positive-- they have this positive home equity.

There's just nowhere near as many people underwater as there were in 2007 and 2008. But we could see a lot of motivated sellers, a lot of people who still have to sell, even if they're not getting kicked out by their bank. I think that's the nearest term event that could actually throw a little cold water on this overheated market.