The light at the end of the tunnel is growing brighter for housing investors, particularly as vaccine rollouts gather steam and the economic recovery widens.

In a recent video breaking down what’s driving the single-family housing market, John Chang, senior vice president and director of research services at Marcus & Millichap, notes that home sales have surged in recent months, with sales activity in February coming in 9.1% higher than 2020. That, in turn, pushed home prices up by 16.2% year-over-year to a median price of $334,500, a record high.

Chang says sales activity would likely be even greater, but the number of homes for sale on the market has dropped to a record low. Typically, new home construction ramps up to meet demand, he says, but new home starts tapered last month to just over 1 million housesa figure that represents 55% of construction levels during the housing boom of 2006. Slower starts are probably the result of what Chang calls harsher than normal weather conditions in February, but are also certainly related to rising material costs, which Marcus & Millichap pegs at 11.4% higher than last year.

The rising costs of lumber have been a particular thorn in the side of builders, who say skyrocketing costs have added around $24,000 to the cost of a new home. A number of builders and trade organizations have recently lobbied the Biden Administration to step in with a legislative solution to curb the bleeding. 

The pandemic has accelerated homebuying, Chang says, as have historically low interest rates. But the biggest driver of first-time home sales, according to Chang, is the “aging millennial generation.” According to M&M, there are currently 45 million people between 30 and 40 years old in the US.  That’s 3 million more than five years ago. The median age of first-time homebuyers is 33, and over the next five years the number of people in that age group is expected to climb by another 2 million.

That growing cohort will also contribute to an expected surge in household formations, Chang says.

“During the pandemic, household formation declined,” he says. “People doubled up and the recession caused people to move in with other family members. But as the vaccinations and stimulus support an economic recovery, household formations are expected to surge,” with M&M predicting 2.5 million more households being formed each year in 2021 and 2022.

This will place “significant pressure” on housing stock in terms of for-sale homes, apartments, and manufactured housing. While new apartment construction hit a record 345,000 units in 2020, with a similar number forecast for 2021, stock will still likely fall short of recovery demand, Chang says.

“To start, the average national apartment vacancy rate, which rose by 20 basis points through the pandemic could turn lower,” Chang said. “Although there could be variance by property class and location as the economy recovers and HH formations accelerate, housing demand could revive, putting downward pressure on vacancies. That will boost housing investment performance.”

Chang says the outlook is strengthening, especially with the accelerating pace of vaccine distribution, but cautions “we’re not out of the woods yet.”

“As the crisis hopefully winds down, competition for assets will rise,” he says. “Investors need to closely consider the demographic drivers, housing demand and the strengthening economic outlook and keep their eyes on the horizon.”