I’ve been riding motorcycles for 47 years and use many of my riding experiences in daily life. Look through the turns, watch for hazards in front of you and expect the unexpected. Like most, the pandemic has clouded my view as I continue to look for sunny skies, long sweepers and tight turns. The daily ups and downs are exhausting, but much of the uncertainty will eventually come to an end. As we progress through the pandemic let’s look for the sunny skies. On my rides I see some light shining in the housing market as families are relocating from cities and looking for more space as they work from home. I’ve also seen the expansion in local neighborhoods and the long-distance destinations. Regardless of the incentive for the moves, the growth is significant in builder sentiment, starts, sales and consumer confidence.
National Association of Homebuilders (NAHB)
The NAHB reports builder confidence in new single-family homes market increased five points to an all-time high of 83 in September. In the 35-year history of the index, the previous high was 78 which occurred last month and in December 1998. That’s despite lumber prices increasing 170% since mid-April, adding $16,000 to the price of a typical single-family home. Record low mortgage rates and the move away from the big cities due to the pandemic have contributed to the positive outlook for demand.
Housing Starts and Permits
The Census Bureau reported that U.S. home builders started construction on homes at a seasonally adjusted annual rate of 1.416 million in August, representing a 5% decrease from the previous month, but a 3% uptick from a year ago. The drop from July was primarily driven by a 25% decline in multifamily homes and a decline when the tropical storms hit the South. However, construction of single-family housing units was up 4.1% and represents the largest share of the housing market.
Building permit activity occurred at a seasonally adjusted annual rate of 1.47 million, down 1% from July, but roughly even with the pace from last year. Single-family building permits increased 6.0% while multi-family building permits decreased 14.2% the continuing demand for single-family homes.
Source: U.S. Census Bureau
New Home Sales
The Census Bureau reported that new home sales surged to the highest level in 14 years and was up 4.8% MoM and 43% YoY. The number is not entirely unexpected given the commentary from the builder community over the past few months reflecting backlogs, surging orders in July and August and indications the strength has continued in September. Sales of new single-family homes in August exceeded an annual rate of 1 million for the first time since 2006. New home sales occurred at a seasonally adjusted, annual rate of 1.011 million, representing a 4.8% increase from an upwardly revised pace of 965,000 homes in July.
Source: U.S. Census Bureau
The S&P CoreLogic Case-Shiller U.S. National Home Price Index shows home values rose 4.8% annually in July, up from the 4.35% YoY gain in June. This was the largest gain since November 2018. The national average now stands at $221k which is up from $212k in July of last year and $205 in 2018. This index is actually a three-month running average, so it incorporates prices from May, June and July. More recent data from others points to prices strengthening even more in August.
Pending Home Sales
The number of homes under contract hit a record high in the National Association of Realtors (NAR) 19-year history. This was up 24.2% YoY after a 15%YoY rise in July. On a monthly basis it was up 8.8% and positive four straight months. Each of the four major regions saw gains in both month-over-month and year-over-year.
The Conference Board’s Consumer Confidence Index surged to 101.8 in August from 86.3 as Americans turned more hopeful towards the economic recovery. That was the largest leap in 17 years as views turned more favorable towards business and labor market conditions and a renewed optimism about the short-term outlook. The Present Situation Index increased from 85.8 to 98.5 while the Expectation Index increased from 86.6 in August to 104.0 this month. Consumer confidence drives spending and if the consumer feels confident about where the economy is heading, they are likely to spend more. This has contributed to demand in the housing market.
The huge demand for housing has been a bright spot in the economy this year. There has been pent up demand and as mortgage rates fell, buyers began flooding the market and inventory is getting scarce. The supply of existing homes has reached an all-time low according to government data going back to 1963 as we’ve seen supply drop from 6 months in February to just over 3 months in August. It appears rates may stay low for the foreseeable future allowing buyers to purchase homes even if the price continues to move up. The issue doesn’t appear to be demand, but rather supply.
The dilemma homebuilders now face is slowing down the pace of construction due to supply shortages, lumber prices and competition for land and labor. Vacant land can take two years to be developed while lumber prices add to the cost of homes. Even if builders want to charge ahead, it’s difficult to get the necessary supplies at any cost. This leads me to believe the inventory dynamic may not change anytime soon based on the tightness in inventory for both existing and new homes and demand in the market.
The housing market has been a bright spot in a challenging year. Remember to look through the turn and position portfolios for the future as the economy picks up steam. This pandemic will come to an end and growth should improve dramatically. Understand what you own and watch for hazards. Expect volatility from the election and ongoing news related to the pandemic as we may see unexpected spikes in virus outbreaks across the country.