Housing Market Expected to Lead Economy

Pent-up demand and new priorities during the pandemic are fueling this sector

By Patrick Duffy

During a confusing year such as 2020, security has understandably taken center stage in the minds of Americans, so it certainly makes sense that many of them are focused on their own personal residence, whether that means buying that first home, adding more space to an existing one, or even upgrading now to take advantage of record-low mortgage rates. Still, although much of the recent rebound in housing demand is due to economic shut-downs in the spring and a return of many buyers to the suburbs, it’s still not clear how long it will last.

Median sales prices eclipsed the $300,000 level for the first time to $304,100, up 8.5% over the past year. 

Fortunately, aggregate economic data is showing continued improvement across the world and in the U.S. The J. P. Morgan Global PMI Composite Output Index rose to a 17-month high in August, and six of seven domestic sectors rose in tandem during the month, with only consumer services continuing to decline. Given the faster-than-expected economic rebound since the spring, the Federal Reserve recently updated its own economic forecast through 2023, and now expects unemployment to end the year at 7.6%, while annual GDP growth will contract by 3.7% in 2020 before rising again by 4.0% in 2021. Fannie Mae is even more bullish in its forecast, predicting a lower GDP growth decline of 2.6% for all of 2020, due largely to an expected boost of 30.4% annualized growth in the third quarter of this year.

Consumers are also feeling better. Following a sharp decline in March, by early September the Consumer Sentiment Index tracked by the University of Michigan had gradually risen to its highest level in six months, although it was still down by over 15% year-over-year. Nonetheless, over the next several months, two primary factors will weigh heavily in the minds of consumers: the outcome of the next election (and how clearly it will be decided) and any delays in the delivery of a successful vaccine for COVID-19. However, separate consumer polls by Morning Consult show this sentiment rebound to have flattened out by mid-September, with some respondents planning on less travel and spending for the upcoming holiday season.

Still, home builders are certainly feeling bullish, with September’s Housing Market Index from NAHB/Wells Fargo rising to a record high of 83, with subcomponents measuring current sales conditions, six-month expectations and traffic of prospective buyers all rising over 70. While it appears that builders did pause a bit in August, with overall building permit activity flat year-on-year and slipping 0.9% from July, a closer inspection shows single-family permits rose 6.0% from July, while those for multi-family units fell by just over 14%. Similarly, although overall August housing starts fell 5.1% from July, those for single-family units rose by 4.1%, while starts for the more volatile multi-family sector fell by over 25%, thus lending further proof to a growing preference for single-family homes.

Meanwhile, the existing home market can barely keep up with demand, with the NAR reporting sales in August jumping nearly 25% from July and up 8.7% year-on-year, while the supply timeline shrank to just 3.1 months, the lowest since February. Median sales prices eclipsed the $300,000 level for the first time to $304,100, up 8.5% over the past year. The online brokerage Redfin is showing an even more frenzied market for the four-week period ending in mid-September, with median sales prices up 13% year-on-year to over $319,000, and nearly half of all new listings reporting an accepted offer within the first two weeks on the market. One concern is that although record-low mortgage rates have helped make these higher-priced homes more affordable, at some point that equation could break down. According to another NAR report, while home affordability rose 5.2% year-on-year through July, it did slip 0.05% from June.

It’s also important to be aware of another side of the housing coin, in which struggling American households spike the mortgage delinquency rate, which could impact housing values over time. In a monthly report covering June 2020, CoreLogic reports delinquency rates reaching 7.1% of all mortgages, with this figure rising by nearly 80% year-over-year to the highest level in five years. Without more fiscal support for these troubled households or a rapid decline in unemployment levels, CoreLogic envisions a potential near-doubling of the existing delinquency rate by early 2022, which could dump more existing home inventory onto the market and thus impact demand for newly built homes. For now, however, it’s a great time to be a home builder.

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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