Homebuilders to Benefit from Long-Term Trends
Homebuilders were unscathed in the pandemic because of elevated demand and limited supply in the resale market; revenues skyrocketed 10% YoY in 2020 and 25% YoY in 2021.?
For 2022, our machines predict revenue to grow in the mid-teens based on record backlog value offset by a slowdown in new orders. In 2023, our algorithms forecast revenue growth to deaccelerate to the high-single-digits, bolstered by long-term trends such as favorable demographics and persistent underbuilding over the past decade.
?Previously, homebuilders' headwinds were solely on the supply front, but during 2022, it swept to the demand side. As inflation accelerated past multiple four-decade peaks, the Federal Reserve raised its benchmark rate – correspondingly, mortgage rates increased. In 1H22, industry revenues climbed 19% YoY, notwithstanding higher mortgage rates, elevated building materials costs, labor scarcity, and supply chain issues.
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For 2H22, our machines project high-single-digit growth supported by the increased value of built-up backlog orders. Effects of the tighter monetary policy will be more acutely felt, with revenue upside limited by slowing demand and construction as the Fed battles stubborn inflation. With mortgage rates roughly doubling compared to the past couple of years, homebuilders that effectively tackle affordability challenges and limit cancellations by offering price reductions, mortgage buydowns, and other incentives will shine. Easing supply chains should improve delivery timelines and continue to cool material costs, providing some wiggle room on profits. Overall, in 2022, industry revenues will demonstrate robust gains in the mid-teens range.
?For 2023, our algorithms forecast homebuilders’ revenue to grow in the high-single-digits, backed by favorable demographics and a decade-long undersupply of homes. Millennials, who overtook Baby Boomers as the largest living adult generation, account for over half of all home purchase loan applications. With the largest cohort of Millennials entering their thirties, homeownership appetite will likely remain solid as renters decide to buy homes and homeowners trade up. Additionally, Millennials stand to gain from the Student Loan Relief program1, which can help first-time buyers afford a down payment.
Furthermore, residential construction did not recover after the Great Recession, although demand did. Sites near big cities face tough competition because of zoning regulations and a lack of public investments in roads, rail, and other infrastructure. Notably, residential land values account for nearly half of U.S. home values. Homebuilders are in the position to benefit from inventory shortages, with some even venturing into the built-to-rent segment.
1In August, the White House announced the Student Loan Relief?plan. It includes up to $20,000 in federal student loan forgiveness for tens of millions of borrowers and extends the pause for student loan repayments. It also incorporates a proposal for a new income-driven repayment plan.