A Zillow survey of economists and other real estate experts finds high costs are expected to slow construction and may lower homeownership among today’s 30-somethings
– The expert panel’s prediction for home price growth is the most optimistic ever in the quarterly survey that dates back to 2010.
– The panel expects new construction to slow in the coming years, with high costs as the main barrier. But last quarter, the same panel predicted total inventory would rise later this year thanks mainly to more existing homes being listed for sale.
– Relaxing zoning rules is what the panel says would be most productive to increase new housing supply.
Relaxing zoning rules would be the most effective way to increase supply in a housing market currently near historic inventory lows, experts say in the latest Zillow® Home Price Expectations Survey.i On the current path, those experts anticipate new construction growth to stall and home prices to rise, resulting in fewer of today’s 30-somethings owning homes.
High costs are expected to slow new construction momentum, which would be a blow to home shoppers who are already facing an intensely competitive market with relatively few available homes when compared to the number of interested buyers. On average, the panel expects new housing starts to end the year 2.5% below December 2020 levels, and to fall an additional 2% by the end of 2022. Panelists cited the high cost of labor, materials and land as the biggest headwinds for home builders.ii
“A prediction for a construction slowdown is surprising given recent positive readings, but rising costs may drag down the pace of construction from its impressive speed this spring,” said Zillow senior economist Jeff Tucker. “Builders have been firing on all cylinders to meet the excess demand from buyers left unmet by the existing home market, and demand appears poised to stay high for years to come. But builders will need buildable land to close the massive shortfall, and zoning changes could move the needle, with the potential to open up enough building capacity to add millions of homes.”
When asked what could be done to increase housing supply, relaxing zoning rules was the runaway top choice. Previous Zillow research has found even a modest amount of upzoning in large metro areas could add 3.3 million homes to the U.S. housing stock, creating room for more than half of the missing households since the Great Recession — a major reason for today’s frenzied housing demand. A majority (57%) of homeowners Zillow previously surveyed believe they and others should be able to add additional housing on their property, and 30% said they would be willing to invest money to create housing on their own property, if allowed.
Other recommendations to increase housing supply according to the panel include easing the land subdivision process, relaxing local review regulations for projects of a certain size, accelerating the adoption of new construction technologies and increasing training to build up the construction workforce.
New construction is of course not the only path to more inventory — a majority of the same panel, when surveyed in Q1 2021, said they expect housing inventory to begin growing again this year, with an increase in existing homes being listed for sale being the most likely catalyst for inventory growth. Previous Zillow research has shown widespread coronavirus vaccine distribution would make 14 million households newly comfortable moving.
With housing demand showing no signs of slowing from a pandemic-fueled boom in the second half of 2020, the expert panel has once again adjusted their home price growth expectations upward. The panel’s average home value growth prediction for 2021 is 8.7% — the highest for any year since the inception of the quarterly survey in 2010. That’s up from 6.2% last quarter and more than double the expectation from the Q4 2020 survey (4.2%). Home value growth is expected to moderate down to 5.1% in 2022, according to the panel, which would still be strong growth compared to a historical average of about 4%.
“A profound shift in housing preferences, adoption of remote employment, low mortgage rates, and the recovering economy continue to stoke demand in the single-family market and drive prices higher,” said Terry Loebs, founder of Pulsenomics. “Strict zoning regulations, an acute labor shortage, and record-high materials costs are constraining new construction, compounding disequilibrium, and reinforcing expectations that above-normal rates of home price growth will persist beyond the near-term.”
Average rates for a fixed 30-year mortgage currently sit near 3%. Panelists expect a small rise to 3.45% by the end of the year, continuing to 3.99% at the end of 2022.iii That would add $55 to a monthly payment on a typical home at the end of this year, and $124 at the end of 2022. Still, this would represent a bargain historically. Average rates were near 5% as recently as 2018, and they started the 2000s above 8%.
In large part due to affordability challenges from rising home prices, the panel on average expects homeownership among 35-44 year-olds will drop slightly over the next five years, when that group will be dominated by millennials. The majority (54%) of experts who expect homeownership to fall among this age group by 2026 cited worsening affordability, via higher mortgage rates and/or home prices, as the top cause.
Of the more optimistic panelists who anticipate more homeowners in this age group, most (61%) said an increased preference to own instead of rent would be the primary driver, possibly because of how the pandemic and the rise of remote work options has changed what we want and need in a home.
Action to Potentially Increase U.S. Housing Supply
Relax zoning rules
Ease the land subdivision process for landowners
Relax local review regulations for projects of a certain size
Accelerate adoption of new construction technologies (e.g., modular building, 3D printing of certain components)
Increase trades training/education to build construction workforce
Reduce mandatory minimum lot sizes
Relax work permit restrictions
Provide tax incentives for private development of municipal infrastructure
Relax restrictions on Accessory Dwelling Units
Incorporate price protection clauses into long-term supply procurement contracts
Improve access to construction financing
*Panelists were asked to select up to three options, and rank in order of expected effectiveness. Scores were computed by weighting the factors selected by their effectiveness ranking.
About Zillow Group
Zillow Group, Inc. (NASDAQ: Z and ZG) is reimagining real estate to make it easier to unlock life’s next chapter.
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Pulsenomics LLC (www.pulsenomics.com) is an independent research firm that specializes in data analytics, opinion research, new product and index development for institutional clients in the financial and real estate arenas. Pulsenomics also designs and manages expert surveys and consumer polls to identify trends and expectations that are relevant to effective business management and monitoring economic health. Pulsenomics LLC is the author of The Home Price Expectations Survey™, The U.S. Housing Confidence Survey, The Housing Confidence Index, and The Transaction Sentiment Index. Pulsenomics® , The Housing Confidence Index™, The Transaction Sentiment Index™, and The Housing Confidence Survey™ are trademarks of Pulsenomics LLC.
i This edition of the Zillow Home Price Expectations Survey surveyed 109 experts between May 11, 2021 and May 25, 2021. The survey was conducted by Pulsenomics LLC on behalf of Zillow, Inc. The Zillow Home Price Expectations Survey and any related materials are available through Zillow and Pulsenomics.
ii The verbatim answer options most often cited by panelists as headwinds were “high labor costs/shortage of skilled construction labor,” “high/volatile materials costs,” and “high land costs/lack of developable parcels in desirable areas.”
iii Assuming a 20% down payment on a home purchased for $280,370, the typical home value in April according to the Zillow Home Value Index.
For further information: Alex Lacter, Zillow, email@example.com