Moody's Zandi Outlook: A Rising Tide Lifts [Almost] All Ships
Moody's chief economist Mark Zandi – who says now, "I have never been as sure in my optimism" – can be counted on for two important skills that have preserved his standing among those whose bets back the steep, front-loaded risks of real estate investment in good years and bad. Both what he looks at and the way he stress-tests the validity of his input assumptions have proved out often enough over the years to make Zandi a staple of any confidence-or-wariness-inspiring housing outlook.
The context, meaningful for forward-looking investment among both residential and commercial real estate investors, is a strong, fundamental backdrop of economic momentum as Millennial generation adults rotate into greater influence at a macro level. That structural strengthening is about to get turbocharged by Uncle Sam's largesse in the form of awaited COVID-19 rescue, stimulus, stabilization of households, small business, and localities, and reignition of parts of the economy that went dormant during early- and medium-term local and regional shut-downs.
With the exception of a downer note or two that explain calls for softness in a handful of larger, urban markets like San Francisco and New York – dinged by both the urge to flee the virus and the awakening to the tantalizing promise of a work-from-anywhere future – Zandi's assumption inputs suggest a scenario for continued strength in the residential complex of investment, development, construction and related businesses.
Here's the tenor of his focus – what to look at and how to look at it – that should reliably guide views of market-rate demand:
Single-family housing starts have been running close to 1.2 million units annualized in recent months, up from fewer than 1 million units just prior to the pandemic and up threefold since the housing bust a decade ago. Housing demand has significantly outstripped supply with inventories of homes for sale all but evaporating, and house prices have rocketed higher. House prices are up close to double digits nationwide through early this year and up by well into double digits in large parts of the West and Midwest. Home improvement has also been booming, as sheltering-in-place households upgrade the living spaces they’ve been stuck in for so long. And those are good investments given the house price gains. Retail spending at building material and supply stores such as Home Depot and Lowe’s is up almost 20% since just before the pandemic struck.
What Zandi does not introduce to his forecast are impacts – potentially consequential ones – that trace more directly to the supply-side impediments and challenges that housing's new construction producers need to factor into operational models.
Most of the builders we've ever gotten to know would say these supply-side constraints are the kinds of problems they'd rather have, but you'd hardly know that to hear them talk about paying $40 dollars for OSB that they would have paid $10 for six months ago.