There’s an overwhelming amount of data and headlines circulating. This column is my attempt to make sense of it all for you, the real estate professional, from an overall economic standpoint.
There are a lot of January data releases to talk about today, so let’s get to it.
Builder confidence
First up is the latest National Association of Homebuilders report on builder confidence.
The index slipped to 83 from 86, but, for context, any reading above 50 means more builders view market conditions as favorable than poor.
Now, as you can see, following a very impressive recovery following the start of the pandemic, U.S. homebuilder confidence has trended lower for the past two months, but that’s not surprising.
Why?
It’s relatively simple. Surging COVID-19 infections in concert with increasing material costs offset record-low mortgage rates.
Builders are still grappling with supply-side constraints related to material costs and a lack of affordable lots to build, and labor shortages are putting upward pressure on new home prices.
It’s very frustrating for builders these days. They see very significant demand for housing — driven by cheaper mortgages and an exodus from city centers to the suburbs and other low-density areas as companies allow employees to work from home because of the pandemic.
Speaking of work-from-home, I did see a number put out by the Census Bureau in their Household Pulse Survey that suggested that about 38 percent of the labor force is now working at least part-time from home. That’s a massive number.
All of the component parts of the survey trended lower with the measure of sales expectations in the next six months falling two points to 83, the gauge of current sales conditions also dropping two points to 90, and the prospective buyers index falling by five points to 68.
I am not worried by this as, even at these levels, builders are still pretty bullish about the market, and I say this because of the housing permit and starts report.
Housing permits and starts
Builders biggest issue as far as material costs are concerned: Lumber prices have risen by 52 percent versus a year ago. This increase in cost and the other issues we just discussed didn’t translate into slowing activity when it came to permits and starts, which both surged in December.
This chart shows the number of single-family permits issued across the country, and the figure rose by 7.8 percent between November and December to an annual rate of 1.226 million units. That’s 30.4 percent higher than seen a year ago — and the fastest rate seen since 2007.
Housing starts impressed too, with a 12 percent month-over-month gain to an annual rate of 1.338 million units — that’s 27.8 percent higher than a year ago.
I would also note that single-family starts have increased for eight straight months now.
And, given the data that we just looked at, it’s not surprising to see a very significant jump in the number of homes under construction.
If you are a little confused by terminology, I should let you know that housing starts don’t relate to the number of homes being built. Starts refer to lots where a foundation has been poured, but it doesn’t mean that vertical construction has commenced. For that, we need to look at the under-construction data shown here.
And the number is pleasing. The current level of ground-up construction is at its highest level since 2007.
The bottom line is that I expect to see the number of starts and homes under construction continue to rise, and the new supply of homes is likely to take some of the upward price pressures off of the resale market.
My current forecast is for new home sales to rise this year to about 988,000 units.
Existing-home sales
And speaking of the resale market, I know that you have all been waiting for the December existing-home sales numbers, and they were released last Friday.
Before we get to the good stuff, I want to start with inventory — or lack of it!
Without seasonal adjustment, the number of homes for sale in December stood at just 1.07 million homes — and that’s down 23 percent year over year.
For perspective, that is the lowest number of homes on record and, at the current sales pace, that represents a 1.9-month supply — that’s the lowest number seen since the National Association of Realtors began tracking this metric back in 1982.
We know that there is nothing to buy, but what’s happening to sales?
Pandemic-driven demand for housing sent total 2020 home sales to the highest level since 2006.
Closed sales of existing homes in December rose just 0.7 percent from November to a seasonally adjusted annualized rate of 6.76 million units. Sales were 22 percent higher than seen in December of 2019.
As unexpected as a global pandemic was, so too was the reaction of homebuyers. After plummeting in March and April, sales suddenly began to climb.
Total year-end sales volume ended at 5.64 million units, and that was a number far higher than I — or anyone — was predicting before the pandemic started.
COVID-19 drove buyers’ desire for larger suburban homes with dedicated spaces not just for working but for schooling as well.
In my opinion, sales could have been even higher if there were just more homes to buy. If we had no inventory constraints, I wouldn’t have been surprised to have seen over 7 million sales occurring last year, and that would have matched the all-time high seen in 2005.
But of course, there is a price to pay when you have so much demand and so little supply.
That’s right. Prices go up!
Prices
Low supply and very strong demand continued to heat home prices, with the median price of an existing home sold in December coming in at $309,800. That’s a 12.9 percent increase compared with December 2019 and the highest December median price on record. This price is only marginally below the all-time high seen last October.
The surge in prices has been quite remarkable, but I am not too surprised. Yes, demand has risen significantly, and supply has not. Much of the growth was driven by mortgage rates that have dropped precipitously since the pandemic started and are over a full percentage point lower now than they were a year ago.
I would add that part of the reason we see such a sharp price increase is that home sales were solid at the high end of the market, where there are more homes for sale.
Sales of homes in the U.S. priced below $100,000 were down 15 percent annually in December, while sales of homes priced between $500,000 and $750,000 were up 65 percent year over year, and sales of million-dollar-plus homes were up by a whopping 94 percent from a year ago.
We can attribute a lot of the luxury market growth to mortgage rates with jumbo rates — that spiked with the pandemic — dropping significantly, and this has led to higher sales.
Breaking out the single-family market from condos, sales leaped in the early summer but leveled off in the fall because of a lack of homes for sale and not a lack of demand.
In 2020, sales of single-family homes rose by 6.3 percent — a massive number that’s even more impressive given that sales only increased by 0.5 percent in 2019.
And prices were, naturally on the rise too, increasing by 9.2 percent last year. That’s the fastest rate we have seen since 2013, and that was when we were starting to recover from the housing bubble that burst and caused home prices to collapse. Buyers jumped in, causing prices to rise significantly.
Condos
Looking now at condos, we see a somewhat similar picture with the annual rate of sales coming in at over 700,000 units, but interestingly, 2020 total condo sales were 0.3 percent lower than we saw in 2019.
What is happening here is a drop in demand for urban multifamily units with buyers working remotely.
And this is also reflected by lower price growth than we saw in the single-family market.
As we move forward, I am still optimistic about the multifamily arena. Nevertheless, we are already seeing softening in demand and price in some markets across the nation, directly referring to San Francisco in the West and New York and Boston back East.
We will continue to see short-term demand and price issues in many urban markets, which doesn’t mean that the overall condo market will collapse.
I think that once we get back to “normal,” we may well see demand increase again, and if we see prices start to drop, I expect demand to rise even further as buyers who had previously been priced out of many of these large cities see that they can now afford to buy.
To get the big picture including all of the data, watch the full video above.
Matthew Gardner is the chief economist for Windermere Real Estate, the second largest regional real estate company in the nation.
