Economic Update September 27, 2021
Economic Update September 27, 2021
Existing home sales dropped but supply is still limited and people are still buying at a near-record pace. This is a good sign for our country since it relies on spending.
New builds sales are up but most are coming for people who are on a waitlist waiting for a new build
Housing should continue to be hot heading into 2022 since many new projects have been approved and awaiting to start.
Existing Home Sales Dropped
The August annualized rate of 5.880 million for existing homes sold decreased by 2.0% to 5.880million. The sales are down 1.5% from a year ago. The pandemic that struck our shores in 2020 has been a rollercoaster ride for existing home sales. It appears that sales are stabilizing at around six million per year (about 5% higher than pre-pandemic levels), despite the ongoing struggles of buyers with high prices, and a lack of supply. The National Association of Realtors’ report contained some negative news about inventories. The recent Delta variant surge seems to have caused August inventories to fall 1.5%.
This is likely to be a temporary disruption. Listings will soon move up again, at most on a seasonal basis, as the virus fears fade. The months’ supply of homes available for sale (how long it would take today’s inventory to sell at current sales paces) was at 2.6 in August. This is still below record levels.
Despite the shortage of listings, there is still significant buyer demand.
In August, 87% of homes that were sold during August were only on the market for a month or less. Due to strong demand and limited supply, median prices have risen 14.9% over the past year. The good news is that prices have been slowing down since May’s 23.6% year-over-year increase. You can expect 2021 sales to be the best since 2006. This is due to increased inventory and moderate price increases.
Why? The first is that a trend towards work-from-home will likely continue even as pandemic-related precautions become less effective. People who had previously been tied to certain locations (typically in urban areas) will now have more freedom and more space in suburbs. Millennials, now the largest generation, are entering the US housing market. They will account for more than half of all new mortgage issuance in 2021. This demographic tailwind will be a boon for sales in 2021 and for the future
New Home Sales Rose Though
Instead of existing home sales, single-family home sales rose 1.5% to a rate of 0.740million annually. This is a sign the housing market has recovered from a string of poor reports earlier in the year. Despite this, sales are still far below the January peak at 993,000. So why have sales been so slow in 2021? Two main reasons are cited: (1) the lack of finished homes and (2) rapid price appreciation (compared to pre-COVID levels).
In the coming year, builders will be expected to increase construction, especially now that there are no more jobless benefits. Having more labor will allow for more construction and eventually more sales, which will slow down the pace of home price appreciation. Buyers are stuck with limited options for completed homes in the interim. The truth is that inventories are on the rise and currently stand at their highest point since 2008. The months’ supply, which is the time it takes to sell current inventory at the current sales pace, has increased to 6.1 months. This compares to the record low of 3.5 months in 2020. This was due to an increase of 12,000 units in inventory which more than offsets the slower pace of sales.
The majority of the inventory gains are still coming from homes that have not yet begun construction or are in progress. A similar calculation using only 100% of the homes that are on the market shows a month’s supply of only 0.6% (a record low since 1999). After nearly a year of declines, the good news is that inventory of completed houses has been increasing. Although it is too early to tell if this is a new trend or not, there are good reasons to be optimistic.
Housing Starts Up 3.9% in August
The August increase in housing starts was 3.9% to an annualized rate of 1.615 million. The number of new housing units is up 17.4% over a year ago. The only reason August saw a gain was because of the volatile multi-family sector where new construction increased 20.6%.
Contrary to this, single-family home construction fell 2.8%, marking the second consecutive decline. Although it is too early to be certain, there are indications that developers might be shifting resources away from single-family homebuilding and towards larger apartment buildings to meet rapidly rising rents. This could be due to people moving back to big cities after the eviction moratorium expires. Zillow reports that rental prices have increased 7.4% over the past year, while Apartmentlist.com claims they have increased 12.0%. This is well above the typical 3-4% increase.
Due to shortages of labor and widespread supply-chain problems, home building has been volatile in 2021. The 12-month moving average, which helps to filter through the volatility, shows that residential construction is now at its fastest pace since 2007. Although activity may slow down as we recover, I believe that housing will continue to rise. My confidence comes from the fact that there are many approved projects in the pipeline