Holding Steady in the Housing Market

Full approval for Pfizer’s shots and employer mandates should give an added lift to the housing market.

By Patrick Duffy

Over the last month, the main story about the U.S. economic recovery has been vaccination rates stubbornly stuck at well below herd immunity, although given the FDA’s full approval of the mRNA vaccine from Pfizer-BioNTech, employers ranging from the military to large private companies are increasingly requiring them from their workers.  With recent polls showing increasing support for fully approved vaccines as well as mandates from employers and customer-facing government offices and businesses, once infections from the Delta variant of COVID-19 subside, the economic rebound should find a second wind.

This pause in growth could actually be a benefit in the long run, allowing supply chains to catch up with demand and putting a ceiling on inflation which has led to higher prices for both businesses and consumers.  Although an early August survey among purchasing managers by IHS Markit showed a further decline to a still-positive 55.4, by far the largest reasons for the slowdown from previous months are various capacity constraints.

The consumer is ready to spend: Between the second quarters of 2020 and 2021, overall food and retail sales rebounded faster than online sales, while the share of online sales fell from 15.7% to 13.3%.  This suggests that shoppers miss the entertainment value and social interaction which commonly accompany brick-and-mortar shopping, which is good news for the nation’s retailers, bars and restaurants.

For the labor market, with initial unemployment claims recently dropping to their lowest level since mid-March of 2020, job growth rebounding strongly in July and the number of job openings in June rising to a series high of 10.1 million, employers are increasingly dangling signing bonuses for new hires while bumping pay and benefits to retain existing ones.  With federal enhanced unemployment benefits running out in early September, we’ll soon see to what extent this financial buffer slowed down the jobs recovery.

Still, according to consumer and business confidence sentiment surveys, the rapid rise of the Delta variant has postponed a normal return to offices, travel and social activities until this most recent surge has abated, which could continue to boost sales of homes in outlying suburbs and smaller metro areas.  It’s likely that the Federal Reserve will take the rebound of virus cases into account before deciding on the timing and the pace of reducing its investments in treasury- and mortgage-related securities, with interest rates hikes to follow long after.

While there have been some recent signs of a cooling off in the housing market, this has mostly been due to lack of inventory and sticker shock for some, which should be alleviated with more supply and new home capacity constraints being addressed.  It certainly isn’t due to lack of demand that July’s new home sales plummeted 27.2% year-over-year (and well over 40% in the Northeast and Midwest), but more due to builders slowing down sales in order to catch up with previous orders.

That’s also why housing starts were up 2.5% year-over-year in July, with builders pulling 6.0% more permits during the same annual time period.  Although builder confidence on the NAHB’s Housing Market Index fell to 75 in August due largely to these supply challenges, the index charting sales expectations over the next six months held steady at 81.

According to Redfin, for the existing home market in July, the slight cooling off has meant an annual decline of over 20% in the demand for second homes, and fewer bidding wars for active listings to the lowest level since January.  More recently, over 5.0% of aggressive sellers have had to lower their asking prices to find buyers, the highest level since October 2019.  Over the next few months, look for a housing market which is still hot but a bit less boiling.

The rental market, after a pandemic-induced lull, is now also rebounding quickly, and according to Zillow’s Observed Rent Index (ZORI), typical rents not only grew by 9.2% year-over-year in July to $1,843 per month, but are 2.9% higher than what they would have likely been without a pandemic.

Looking ahead, even with the Delta variant adding new challenges to the economic rebound, today we have an arsenal of medical, technological and financial tools which were rapidly accelerated over the past 18 months.  While it’s too soon to know which pandemic-related habits are here to stay and which will disappear over time, the idea of housing as one’s sanctuary from the outside world is likely to remain a permanent priority for today’s Americans.

Patrick Duffy is a Principal with MetroIntelligence and contributes to BuilderBytes. He can be reached at pduffy@metrointel.com or at 310-666-8288.

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