Housing Market continues down its own path

The economic crystal ball remains cloudy, but the housing bull market continues

By Patrick Duffy

If you had told me back in March that two of the economic impacts of the COVID-19 virus half a year later would be booming housing and stock markets, that statement would have probably seemed counterintuitive. Yet with the benefit of hindsight, what’s really been happening is mostly an acceleration of long-simmering trends boosted not just by advancements in technology, but in greater acceptance by both companies and many workers on the benefits of remote work.

On the flip side, while it’s not yet clear on how permanent or widespread remote work will be, both buyers and builders of homes seem to be assuming it’s here to stay. As for urban environments, if pandemic history is any guide, they’ll eventually recover, but for now they’re ceding substantial ground to suburbs and smaller cities.

Builders are certainly bullish about the near future, with their confidence levels on NAHB’s Housing Market Index rising to another high of 85, the first time that the index has been above 80 for two consecutive months or more.”

Builders are certainly bullish about the near future, with their confidence levels on NAHB’s Housing Market Index rising to another high of 85, the first time that the index has been above 80 for two consecutive months or more. Most of this confidence is due to strong demand for single-family homes, with September housing starts up over 22% year-on-year versus a decline of 17.4% for multi-family units in buildings with five or more units.

Building permits showed a similar trajectory, with single-family permits up 24.3% year-on-year versus a decline of 22.2% for multi-family units. Homeowners are also investing more in existing homes, with the NAHB’s Remodeling Market Index rising to 82 in the third quarter of 2020, for a jump of 71% since the first quarter of the year.

For those wishing to live in a lower-density home but not ready or able to buy, CoreLogic’s national Single Family Rent Index rose by 2.1% year-over-year in August, whereas Yardi Matrix’s rent metric for multi-family units fell 0.3% nationally, and the loss was substantially higher in markets such as San Jose (-5.5%), San Francisco (-5.1%), Boston (-2.5%) and Orlando (-2.2%).

Builders are doing what they can to meet demand, but with the timeline of unsold inventory of new single-family homes at just 3.3 months in August – the lowest in the history of the Census Bureau series since it was first launched in 1963 – that has put considerable pressure on the existing home market. With listing inventory of existing homes down 19% year-on-year in August to a timeline of just 3 months and interest rates at historic lows, home prices have been on a steady rise.

According to the listing site Redfin, for the four-week period ending October 11, the median sale price rose nearly 15% year-on-year to $320,644, a record high. Buyers, not wanting to risk the rejection of a low-ball offer, sent the average sale-to-list ratio to 99.5%, also a record high. Interestingly, considering that 57% of Redfin visitors plan to wait until after the November election to purchase or sell a home, these dynamics could certainly change over the next few months.

Another factor to consider is the permanency of remote work which allows employees to live in far-flung locations far from the office. Although some tech-related companies such as Zillow and Square have announced policies allowing remote work indefinitely, more traditional firms including JP Morgan, Chase and Netflix have decided that their corporate culture loses too much when employees aren’t interacting on a regular basis.

Microsoft’s CEO is reportedly already tired of working from home, suggesting that the blurred lines between work and home life can lead to negative mental health impacts. Moreover, research from an economics professor at Stanford University has shown that after nine months, half of employees in one study were ready to return to the office, even if that involved a commute. He has also concluded that innovation suffers from an all-remote workforce. Consequently, this surge of interest in far-flung suburbs and smaller towns may be more of a pandemic-related trend than a longer-term shift.

As for the overall economy, there are four primary factors to track in the months ahead: (1) The results of the November election; (2) The size and duration of another stimulus package to support small businesses, cash-strapped state and local governments, and the unemployed; (3) The impact of a winter surge in virus cases across the Northern Hemisphere; and (4) The efficacy, roll-out speed and public acceptance of a vaccine. For the time being, although the housing market gets to continue on its own, positive path, managing risk will still be essential.

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