Climate migration is already happening for homeowners (who can afford it). Nearly half of Americans who plan to move in the next year say natural disasters and extreme temperatures factored into their decision to relocate, according to a survey conducted by Redfin. One in 5 Americans believe climate change is already negatively impacting home values in their areas, and 35% of homeowners have already spent $5,000 or more protecting their homes against climate change. Meanwhile, 79% of Americans said they would be hesitant to buy a home in areas with increasing frequency or intensity of natural disasters. 75% said they’d be hesitant to buy in an area with extreme temperatures. And 76% said they would be hesitant to purchase in regions with rising sea levels. Ironically, there’s no shortage of buyers for properties that “concerned” homeowners are abandoning. In fact, Redfin found that more people are actually moving moving into areas facing high risk from climate change than out of them. Of course, affordability is the major factor. As expected, counties where many homes face high heat risk are less expensive on average. So, with climate change on our minds, let’s put on our face masks, get vaccinated (and the booster if eligible), social distance, and let’s review all the exciting housing news this week…

Existing Home Sales Declined in August. Existing home sales declined 2.0% in August to a 5.880 million annualized rate. Sales are down 1.5% versus a year ago. Since the pandemic hit our shores in early 2020, sales of existing homes have been through a wild ride. Now it looks like sales may be stabilizing around a six million annualized rate (about 5% above pre-pandemic levels) despite buyers' ongoing struggle with high prices and lack of supply. Speaking of supply, there was some bad news on inventories buried in the National Association of Realtor’s report. It looks like the recent surge in the Delta variant disrupted August inventories, falling 1.5%. Expectation is that this is probably a temporary disruption and listings will soon move upward again, at least on a seasonally adjusted basis, as virus fears once again fade. Meanwhile, the months' supply of existing homes for sale (how long it would take to sell today's inventory at the current sales pace) was unchanged at 2.6 in August, remaining near record lows. Despite the ongoing shortage of listings, there is still significant pent-up demand from the pandemic, with buyer urgency so strong in August that 87% of the existing homes sold were on the market for less than a month! The combination of strong demand and sparse supply has pushed median prices up 14.9% in the past year. But the good news is that price gains have been decelerating since hitting a year-to-year gain of 23.6% in May. As more inventory becomes available and price gains continue to moderate, you can expect sales in 2021 to ultimately post the best year since 2006. Why? First, a trend toward work-from-home is likely to remain in place even as pandemic-related measures ease. That means people who were previously tied to specific locations (typically urban areas), will have more flexibility, making more space in the suburbs an attractive proposition. Finally, Millennials are now the largest living generation in the US and are entering the housing market in force, making up over 50% of new mortgage issuance in 2021. This represents a demographic tailwind for sales not only in 2021, but for the foreseeable future.

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.

Crazy SoCal Housing Market is Finally Cooling. Southern California home prices were essentially flat in August, as the market cools slightly from its torrid pace earlier this year. The six-county region’s median sales price (the point at which half the homes sold for more and half for less), was $680,000 last month, according to data released by firm DQNews. That’s a 0.1% slip from July. Reflecting strong growth over the last year, the median was 13.9% above August 2020 levels. While sizable, that year-over-year gain was the smallest price rise since February. Real estate agents say some home buyers have called it quits after engaging in bidding wars they never could win. And many analysts predicted home price gains would moderate soon, because incomes can’t support continued price appreciation at the 20%. The pandemic market frenzy was in large part sparked by record low mortgage rates and the desire for more space. Still, as the market cools, few experts expect home values will decline in the near future, given the long-running mismatch between supply and demand. Here’s how the price and sales gains broke down by county compared with a year earlier:

• In Los Angeles County, the median price rose 13.4% to $785,000, while sales climbed 14.3%.
• In Orange County, the median price rose 12.5% to $900,000, while sales climbed 4.5%.
• In Riverside County, the median price rose 19.3% to $525,000, while sales climbed 6.4%.
• In San Bernardino County, the median price rose 22.4% to $465,000, while sales climbed 9.2%.
• In San Diego County, the median price rose 13.3% to $725,000, while sales climbed 3.5%.
• In Ventura County, the median price rose 14.8% to $740,250, while sales climbed 1.3%.

Leaning Millennium Tower is Sinking Fast. In San Francisco’s “South-of-Market” district, a retrofit of the leaning Millennium Tower has been suspended after crews discovered the building was sinking much faster than originally feared. The nearly $100-million retrofit was halted and a four-week moratorium was announced “while we try to understand the mechanisms associated with the increased settlement rate and available means of mitigating the tilting,” Doug Elmets, a spokesman for the luxury residential building’s homeowners association, said in an email. In other words, holy shit, this thing is starting to look like the “Leaning Tower of Pisa”! San Francisco’s sixth tallest skyscraper, Millennium Tower has sunk since construction began in 2006 and the tilting is now accelerating. The problem for Millennium Tower, structural engineers are saying, is that its foundation reaches only to a layer of sand, just above a layer of clay, instead of farther down into bedrock. Such a construction practice was common in this part of San Francisco, where the bedrock is quite deep underneath thick layers of soft soil, sand and clay. But that practice was for buildings that were much shorter and lighter than Millennium Tower. The homeowners association, Millennium Tower Assn., announced plans for the engineered retrofit of Millennium Tower to “prevent any significant future settlement of the skyscraper.” The plan involved installing 52 concrete piles (or columns) that would anchor the building to bedrock, 250 feet below ground. The retrofit was supposed to provide long-term assurance of the tower’s performance in the event of any future construction nearby and would potentially reverse a significant portion of its sinking and tilting. But now that seems increasingly unlikely. Millennium Tower was developed by New York-based Millennium Partners, which sold off the residential units to people who bought condo units in the building. The homeowners are now claiming this ongoing disaster is evidence that Millennium Partners cannot and should not be trusted with building buildings in other cities. As expected, Millennium Partners declined to comment.

Home Flipping Increases While Profit Margins Drop. Hey, all you house flippers out there, listen up. ATTOM has released its second-quarter 2021 “U.S. Home Flipping Report” showing that 79,733 single-family homes and condominiums in the United States were flipped in the second quarter. Did you flip any of them? Those transactions represented only 4.9 percent of all home sales in the second quarter of 2021 (or one in 20 transactions), the first increase in more than a year. The report further shows that although the flipping rate rose, profit margins dipped to a 10-year low. The gross profit on the typical home flip nationwide (the difference between the median sales price and the median paid by investors) in the second quarter of 2021 was $67,000. But the national gross-flipping ROI was down from 37.2 percent in the first quarter of 2021, and from 40.6 percent a year earlier, to its lowest point since the first quarter of 2011 (when the housing market had yet to start recovering from a price slump brought on by the Great Recession in the late 2000s). Specifically, the median price of homes flipped in the second quarter of 2021 soared to an all-time high of $267,000. That was up 10.6 percent from $241,400 in the first quarter of 2021 and 18.7 percent from $225,000 a year earlier. The annual increase marked the biggest price spike for flipped properties since 2005, and the quarterly gain topped all improvements since at least 2000. Of course, the price surges on both sides of flipping deals came amid an ongoing housing-market boom that continued during the second quarter of 2021 despite widespread financial damage done to the broader economy by the Coronavirus pandemic that hit early in 2020. As I described above, home prices continued surging amid a glut of buyers chasing an already-tight supply of homes stifled further by the pandemic. Those buyers were drawn into the market in large part by 30-year home-mortgage rates that dipped below 3 percent and a desire among many households to escape virus-prone urban areas and opt for space to accommodate “work-at-home” lifestyles in the x-burbs. Home flippers who sold properties in the second quarter of 2021 took an average of 147 days to complete the transactions, the lowest level since the third quarter of 2010.