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    Housing starts still forecasted to be above 2020. But supply-chain issues, material costs are affecting builders.

    Housing starts are still expected to end at a marked year-over-year increase from 2020 but supply-chain issues and material costs are dampening builder optimism.

    Housing starts declined 7% month-over-month in July — the most recent data available — to a seasonally adjusted annual rate of 1.534 million, according to U.S. Census Bureau data. Meanwhile, an August survey by trade association National Association of Home Builders found builder confidence to be at its lowest level in 13 months, owing, in part, to higher materials costs.

    Still, industry sources that track housing metrics predict an 11% to 12% increase in housing starts for 2021, or about 1.55 million units. That would be up from 1.38 million housing starts in 2020, which was a 7% increase over 2019.

    Moderating demand and longer construction times, owing to supply-chain issues exacerbated by the pandemic and cost escalations, have some analysts cautious. But analysts at Morningstar Research Services LLC predict starts to exceed, on average, 1.6 million units annually in the coming years.

    Brian Bernard, director of industrials equity research at Morningstar, tracks several public homebuilders and said larger groups especially have been bolstering their land holdings in anticipation of demand.

    “Overall, it’s been harder to get land, but the big guys have been increasing their lot count,” Bernard said.

    In fact, the number of lots owned and controlled by public homebuilders has surged 35% year-over-year, to nearly 1.85 million lots. But, he continued, builders are having a hard time replacing communities after delivering others because they sell out so quickly in the current environment.

    Bernard said many of large builders are also moving toward joint ventures with third parties. Homebuilders will enter into land or lot option contracts, or pursue joint ventures, to mitigate their risk.

    Arlington, Texas-based homebuilding giant D.R. Horton Inc.’s lots, as an example, are about 70% optioned right now, Bernard said. The move to optioning land among homebuilders has been occurring for a few years now, he said, but at a faster rate than expected.

    Even though larger builders have been able to accumulate and control more lot holdings across the U.S., small- to medium-sized builders are especially feeling the crunch in obtaining land tracts. Housing demand remains high, although Bernard said he thinks some estimates of demand are inflated. The National Association of Realtors has estimated the housing shortage to be about 5.5 million units, but Morningstar believes it’s closer to 3.8 million.

    Robert Dietz, chief economist at the National Association of Home Builders, said demand remains strong and construction has rebounded in 2021, in both single-family and multifamily housing.

    “The worry is, we’re getting back to more sustainable rates of production, but these higher prices have priced out of a number of buyers,” Dietz said. He said the 20% year-over-year spikes in home prices are unsustainable.

    Delays in materials like windows and appliances have slowed timelines for projects, but the persistent labor shortage in construction is also impacting homebuilders. Bernard said he’s heard of some builders, especially smaller ones, having to fly tradespeople in to complete tasks on a job site because they can’t access that labor locally.

    Dietz said there’s a mismatch currently between adding new supply at a price that’s affordable to the first-time homebuyer.

    “The issue of housing affordability is going to take time and it’s going to require patience,” Dietz said. “We’re seeing changes in commuting patterns, given the rise of the hybrid work model … we think 30%, maybe 40%, of the American workforce is going to be working under that model.”

    That expands a metropolitan area for where a household may purchase a home, he continued. Builders are subsequently moving farther out to acquire land, following demographic trends and also out of necessity, given lower cost of land and greater availability than closer-in areas.

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