New Home Sales Increased in August. As opposed to existing-home sales, new single-family home sales increased 1.5% in August to a 0.740 million annualized rate. The increase in sales, the second month in a row, is a sign that the housing market may have found its footing after a series of weak reports earlier this year. That said, sales are still well below the January peak of 993,000. So, why have sales generally been slowing so far during 2021? I think for two main intertwined reasons: (1) a lack of supply of completed homes, plus (2) rapid price appreciation (versus pre-COVID levels). Accordingly, look for builders to ramp up construction in the year ahead, particularly now that excess jobless benefits are finished. That added labor supply will facilitate more building and ultimately more sales (while slowing the pace of new home price appreciation). In the meantime, buyers are still stuck dealing with very few options when it comes to completed homes. It's true that overall inventories have been rising recently and now sit at the highest level since 2008. This has pushed up the months' supply (how long it would take to sell the current inventory at today's sales pace) to 6.1 months from a record low reading of 3.5 months in late 2020. The gain was due to a 12,000 unit increase in inventory, which more than offset the faster pace of sales. However, almost all of this inventory gain continues to come from homes where construction has either not yet started or is still underway. Doing a similar calculation with just 100% completed homes on the market shows a months' supply of only 0.6 (near record lows going back to 1999). The good news is that the inventory of completed homes has been rising recently after nearly a year straight declines. While it's too early to say if this represents a new trend, there are reasons to be optimistic. As I pointed out in previous Economic Updates, builders have plenty of projects in the pipeline to meet demand and are likely to keep construction activity running on all cylinders for the foreseeable future. And as more homes become available, you can expect demand will remain strong and help boost sales later in 2021 and beyond.
Housing Starts Increased 3.9% in August. Housing starts increased 3.9% in August to a 1.615 million annualized rate. New housing construction is up 17.4% versus a year ago. However, all of the gain in August was due to the more volatile multi-family sector, where new construction rose 20.6%. In stark contrast, construction of single-family homes fell 2.8%, the second decline in a row. While it's too early to know for sure, there are signs developers may be shifting resources away from single-family home construction and toward larger apartment buildings in response to rapidly rising rents (as people move back into big cities and the eviction moratorium ends). Zillow estimates that rental costs are up 7.4% in the past year and Apartmentlist.com estimates they have risen an even faster 12.0% (easily exceeding typical gains in the 3-4% range). Home building has been volatile so far in 2021 due to widespread supply-chain issues and shortages of labor. But looking at the 12-month moving average (which helps sift through that volatility), residential construction now stands at the fastest pace since 2007. While the monthly pace of activity will ebb and flow as our recovery continues, I expect housing starts to remain in an upward trend. A big reason for my confidence is that builders have a huge number of permitted projects sitting in the pipeline waiting to be started. The backlog of projects that have been authorized but not yet started is currently the highest since back in 1999. In fact, new permits increased 6.0% in August to a 1.728 million annualized rate. Compared to a year ago, permits for single-family units are down 0.1% while permits for multi-family homes are up 44.3%. Keep in mind, the U.S. needs roughly 1.5 million housing starts per year based on population growth and scrappage (voluntary knockdowns, natural disasters, etc.). However, we haven't built that many new homes in any calendar year since 2006. But with plenty of future building activity in the pipeline and builders looking to boost their inventory of homes and meet consumer demand, it looks likely construction in 2021 will cross the 1.5 million unit benchmark this year and then move higher in 2022.
Home Builder Confidence Improves. The National Association of Home Builders’ “Monthly Confidence Index” increased one point to a reading of 76 in September. The slight uptick comes after a three-month decline in optimism among home builders. The index measuring traffic of prospective buyers notched the largest gain, with a two-point increase to a reading of 61. The gauge on current sales conditions rose one point to 82, while the measure of sales expectations over the next six months remained even at 81. As the report notes, one of the largest headwinds for the home-building sector will be affordability. Rising home prices and construction costs threaten to alienate potential buyers who may balk at spending so much on a new home. Cheaper regions of the country, including the South and the Mountain West, continue to see growth. That said, our nation continues to face a significant shortage of housing supply (see above), which gives builders a long runway to play with. Home builders are selling virtually everything they build and are having to restrict sales due to ongoing supply shortages, which are making it difficult to know when they can complete a home. While spot prices for lumber have trended lower lately, the cost of lumber to build a home is still well above where it was prior to the pandemic and shortage of building materials remain a major hurdle for builders around the country.