Dimitri Petit-Frere
Economic Update – Monday, August 2
GDP is up but it is misleading because las year was down sharply
Many business are doing better but are still impacted by supply and worker shortages
Housing may be cooling off but dont expect prices to fall anytime soon
Real ?GDP is up 6.5%
In the second quarter of 2021 (April-June), real gross domestic product (“GDP”) increased by 6.5% annually. Normally, everyone would be thrilled if the economy grew at 6.5% annually. The COVID rebound and disaster, massive fiscal stimulus from the federal government, and loose monetary policy made it disappointing that real GDP grew at 6.5% in the second quarter. This is less than the 8.4% consensus. Consumer spending grew at 11.8% annually in Q2, but business investment in equipment, intellectual property, and machinery grew at 13.0% and 10.7% rates, respectively. That’s a good thing.

Real GDP by Quarter courtesy of BEA.gov
However, inventories have hurt business growth, slowed by supply-chain issues, worker shortages, and digging deeper into their stockpiles in order to meet consumer demand. Economists will point out that real GDP has reached a new record high. Real GDP has only grown by 0.5% annually since its peak in late 2019 and would have grown even faster if COVID was not available.
Our economy is larger than ever, but it is still not as large as it would be if COVID was not in place. The report’s best news was the substantial upward revision in corporate profit over the past few years. Q1 corporate profits (the most recent data available) were 8.6% higher than the previous estimate from last month. There were many signs that monetary policy was too easy and that the Federal Reserve should not wait to begin tapering its bond purchases (which will eventually raise interest rates).
Housing Market Is Cooling?
This shift in momentum suggests that prices will likely resume their fall seasonal break. Although I wouldn’t describe today’s housing market as “buyer-friendly,” it is slowly moving in the right direction. The National Association of Realtors reported that the median listing price grew by 10.1% last year. This marks 47 consecutive weeks of double-digit price increases. As the rate of growth slows, we may see single-digit price increases as soon as next week. This pace of growth is still higher than usual and comes as the median home listing price hit a 5th consecutive record high in June at $385,000 (LA County $750,000).
However, home prices did not cool until November 2020. You can however expect home prices to fall in August this year in a more normal fashion. This will create opportunities for off-season investors. The number of homes being put up for sale (a measure of new listings) fell 3%. In the past 15 weeks, 12 of the 15 NAR listings have been more than last year. In the last few months, there has been a lot of new sellers which has led to slower price growth and smaller inventory drops. They saw a slight dip in inventory this year, but it was still significant.
Despite the fact that the housing market is still short of homes to sell, steady increases in the number of sellers are making it more attractive. The average time on the market was 23 days shorter than last year. In July, the average active listing lasted 37 days. This was a new record. The gap between this year and last year’s market is narrowing. This is being compared to 2020, which saw listings move uncharacteristically fast in the latter part of the year. This gap will shrink further if 2021 experiences a relatively normal season.
Existing Homes Sales Slump
The government reports that new home sales fell 6.6% to a rate of 676,000 compared to existing homes. The “annual rate” refers to the number of homes that would be sold each year if the same number of homes were purchased in each month as in July. This was the lowest level recorded since the beginning of the U.S. Coronavirus Pandemic in early 2020. It was due to high prices and limited supply, which frustrated many potential buyers. The January sales of new homes rose to almost 1,000,000 annually, the highest level since 2015, as buyers took advantage record-low mortgage rates.
High costs and a lack of homes to sell have resulted in sales falling since then. There are many people who want to purchase homes. However, high prices and limited choices make it difficult. The average home cost is about 12% more than a year ago and close to a record high. The result of high customer demand and higher prices for building materials (such as lumber), is that home prices have risen. Also, builders can’t find enough bricklayers, carpenters, and other skilled craftsmen to complete the job. Builders will sometimes wait to list their homes, even if they don’t want the extra cost of materials. They can pass on the increased costs to customers by waiting. These issues will continue to be a drag on housing markets for many months. It’s not only a problem, but many homeowners are unable to sell their homes as they may not have another place to live in. Although the median sale price for new homes fell to $361,000 in June, it is still significantly higher than one year ago. From 5.5 months, the inventory of new homes for purchase rose to 6.3 from 5.5. This is how long it would take for all houses to be sold at the current home-buying pace.