While the pandemic may have slowed down many sectors of the economy, the residential housing market has held strong and will continue to thrive in 2021, post-pandemic.
That’s the assessment of a leading TD Bank economist who recently provided an economic forecast for construction professionals, part of a Fall webinar series hosted by BCA Insurance Group and Avrio Solutions, which specialize, respectively, in insurance/bonding and accounting services for contractors. Pent-up demand during the shutdown along with historically low interest rates were the prime movers in the uptick in single-family homes.
That demand hasn’t carried over to multi-family dwellings, such as apartment complexes, noted Admir Kolaj, who’s been with TD since 2013 and whose analyses are frequently quoted in the financial press. Since the pandemic began, single-family starts are up around 13% from the pre-pandemic peak, while multifamily starts are down about 40% from their pre-pandemic peak. He attributed this in part to the virus-fueled but continuing migration of people from city living to the more socially distanced-friendly environs of the suburbs. Existing homes have also fared well, with low inventory helping to prop up prices.
“Fast-rising prices and low inventory are generally good signs for home builders, and those focused on the single-family market are feeling very confident,” said Lawrence D. Cohen, executive vice president of BCA Insurance Group. “Sales should hold steady for the first half of 2021, and the number of prospective buyers will continue to outpace the number of homes available during that time period, even as multifamily construction continues to stagnate.”
The BCA Insurance/Avrio Solutions webinar on December 1, 2020, highlighted several other economic trends relevant to builders:
- Commercial project starts will continue to struggle under the weight of the pandemic. Enforced closures and consumers shopping much more online have contributed to increased vacancies in retail. Office vacancies have risen, too, as more people work from home during COVID-19, a trend that will likely continue even after the pandemic ends.
- Gross Domestic Product is down and will take time to rebound. GDP, a key indicator of economic vitality, was actually better through the third quarter of 2020 than anyone had reason to expect, but it will take time before that metric returns to a pre-pandemic level. Kolaj pointed out that the 10% drop in GDP in the first half of last year portends a giant hole from which the economy will need to dig out. The distribution of COVID-19 vaccines represents a light at the end of the tunnel, and GDP could grow by 4% or 5% depending on whether Congress passes additional economic relief packages.
- Elections have consequences, in this case good ones. While the makeup of the Senate remains undecided, President Biden can take executive action on trade, immigration and environmental regulations that will have positive long-term effects on GDP and, as a result, lead to more economic growth and a net positive on housing and construction. Further, if a friendly Congress implements his economic agenda, $2 trillion earmarked for public projects would get off the ground over the next 10 years, a shot in the arm for clean energy and infrastructure projects.
- Home buyer tax credit could further accelerate new home starts. The new administration plans a first-time home buyer tax credit of $15,000. This will make home buying more affordable, as it can significantly help with down payments, and that will be a further boon to the housing market.
- Low interest rates are here to stay - for a while. Exceptionally low rates can help builders directly and indirectly. For companies that carry debt or leverage debt to finance their operations, lower rates cut down on their costs and boost profit margin. Low rates help out other areas of the economy, as well; home buyers, for example, can keep single-family builders thriving, and home owners can renovate to add more space for working at home.
- The insurance market is experiencing a generational tightening. Cohen notes that there have been significant increases in premiums in certain areas like auto coverage and excess liability. Contractors need to be mindful of these cost increases when bidding on jobs.
- Borrowing might not always be the right choice. With interest rates so low, construction company owners might be tempted to invest in new equipment to take advantage of the rates and diminish their tax bill. But Steve Beppel, CPA and founder of Avrio Solutions, cautions against making snap decisions. “Borrowing to finance equipment that’s not going to be used much might not make sense, and will certainly outweigh potential tax benefits,” he says. “It can be a balancing act, so you should consult your trusted professional to figure out what’s right for your business.”
