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  • Writer's pictureDimitri Petit-Frere

Economic Update – Monday, July 26, 2021

  1. Existing homes sales are up 23% from a year ago

  2. Housing inventory is a problem and its only going to get worse

  3. Lumber prices are falling back to earth but housing prices wont any time soon

Existing Home Sales Increased In June

According to the National Association of Realtors, existing-home sales rose 1.4% to 5.860 million annually in June, an increase of 22.9% over a year ago. Sales actually broke their losing streak and rose for the first time since May due to modest increases in the supply of homes for purchase and strong demand. There are good reasons to believe that the worst of the inventory shortage is over. The pace of new home construction is still strong. With vaccines readily available and the pandemic likely to end, it’s possible that more sellers will be comfortable listing their homes. These factors likely contributed to the 3.3% increase in inventories. It was also the fourth consecutive month with gains. Although inventories are still lower than a year ago by 18.8%, the year-to-year rate of decline is slowing.?

Although the months’ supply, which is how long it would take for existing homes to sell at current sales paces, rose to 2.6 in June, from 2.5 in May. However, these readings remain close to record lows. Despite the shortage of listings, there appears to be significant buyer demand. In June, 89% of homes that were sold June were still on the market for less than a month. Economists predict that 2021 will be the most successful year for sales since 2006. Why? First, listing more people (as the pandemic subsides), should reduce the worst effects of the supply crunch. This will also help to keep prices down and limit price growth. A trend towards work-from-home is expected to continue even though pandemic-related measures are being eased across the country. People who had previously been tied to certain locations, usually in urban areas, will now have more freedom and more space in suburbia. There are also significant demographic tailwinds that will be favorable for home sales in the future. Census Bureau projections indicate that the key buyer population for homebuyers is those aged between 30 and 49 years. This will continue to increase through 2039.?????

Homebuilders Struggle with Lack of Labor and Materials

We look at two signs when we consider new housing construction:

(1) starts

(2) permits

Referring to starts? The U.S. Census Bureau reports that U.S. homebuilders began construction at a seasonally adjusted annual rate of 1.64 million in June. This is 6.3% more than the previous month’s revised figure. Housing starts have increased 29% compared to June 2020. However, the year-over-year comparison is somewhat distorted by COVID-19. However, the pace of permits for new housing units fell in June. The seasonally adjusted annual rate for permits to build new homes was nearly 1.6 million, which is 5% less than May but 23% more than a year ago. In June, construction companies began to build more single-family homes as well as multifamily houses than in the previous month. Recent sentiment data from homebuilders indicated growing uncertainty about the strength of the new home market. Despite the fact that the construction industry is still facing serious shortages in labor and materials, the building costs are rising. However, lumber prices have stabilized after months of being at or close to record highs. However, the factors that have fueled home construction aren’t gone. There is still not enough housing in the country to satisfy demand, which has driven people into the market for new houses. But rising home prices and general stress from home-shopping (i.e. “Bidding Wars, some buyers may feel that the “could be impacting their ability to buy a home. Recent mortgage applications data has shown a growing lack of interest from buyers. The pandemic saw a rebound in housing, aided by shifting consumer demand, particularly for single-family homes. However, buyers and builders are both being constrained by high input costs and a shortage of inventory.

Lumber Prices Are Down, Homes Likely Won’t Cost Less

Lumber prices have dropped so much this spring after rising to an alarmingly high level, that some buyers are finding it difficult to afford them. In May, two-by-4 prices soared to more than twice the previous record. This was three years ago when about 15% fewer homes were being built. According to Wall Street Journal, wood prices have plunged to levels similar to those before supply cuts and increased demand. The July futures closed Wednesday at $521.40 for 1,000 board feet. This is nearly 70% lower than the May high of $1711.20, which was when wood-product supply lines had not been nailed after the lockdown.

Also, before Americans started shifting spending away from home improvements to vacations or dining out, the July futures were close to the May high of $1711.20. This is good news for builders and DIYers and helps to ease fears about runaway inflation that could hamper the economic recovery. However, new home buyers shouldn’t expect to receive discounts. Builders say they are more likely to make higher profits than lower asking prices. This is common after periods of rising commodity costs. Companies can pass on more expenses because they have greater economic growth. Home Depot is an exception to the rule, as this was where many cooped up Americans sought refuge during the pandemic. In recent weeks, the retailer has reduced its lumber prices. On June 21, eight-foot studs were available in stores for $7.48. They were then priced at $6.25 this weekend. Retail lumber sales have been affected by sticker shock, according to traders and price forecasters. Restaurants and bars that build outdoor seating areas are seeing a surge in demand. The lower prices are attracting buyers, particularly developers of large projects like apartment buildings.

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