Robust New Orders, Backlogs Expected to Boost Homebuilding Growth

After slowing during Q2 2020 as the pandemic took hold, homebuilding demand picked up during Q3 and will remain robust, says Moody's.

Moody's Investors Service
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Moody's Investors Service

The outlook for the U.S. homebuilding sector has been revised to positive from stable, Moody's Investors Service says in its 2021 outlook report. After slowing during the second quarter of 2020 as the pandemic took hold, demand picked up during third quarter and will remain robust in the new year, boosting homebuilders' revenue and profitability.

"The positive outlook for the US homebuilding sector reflects expected revenue growth of 10% to 12% in 2021, along with gross margins of 20% to 21%," said Natalia Gluschuk, Moody's analyst. "The homebuilding sector will continue to vastly outperform the broader US economy in 2021, given favorable fundamentals and increased emphasis on home ownership."

Inventories of both new and existing homes are low as a result of strong demand and construction constraints in 2020, which supports homebuilders' pricing power and bodes well for their gross margins, Gluschuk says. Housing starts and new home sales remain at or below long-term averages, indicating a lack of excess supply, especially given population growth. At the same time, low interest rates will continue to drive demand and support affordability.

In addition, large swaths of the population are now spending significantly more time at home due to remote working arrangements implemented to curb the spread of Covid-19, which also drives demand for homes. Increased remote work will continue to encourage homeownership in areas further from city centers and employment locations.

During the third quarter new housing orders were up on average 50% and backlogs were up nearly 40% over a year ago, with demand continuing to remain solid in the fourth quarter, Moody's says. However, modest production constraints are expected in 2021 including a short supply of developed lots, longer land permitting processes, and interruptions of building materials and labor availability. These factors will lengthen construction times and limit revenue growth.