Housing Market: Still Hot or Cooling Down?

Grace Campbell

Grace Campbell

Jun 15, 2021 –

June 15, 2021

America’s housing sector has taken some unexpected turns during the pandemic. 

Housing activity saw record levels in 2020 despite uncertainty in the market. But in the throes of the pandemic amid health concerns and a rapidly changing workplace situation, people sought larger residences amid historically low mortgage rates and remote work flexibility.

So far, those trends have carried into 2021, keeping the market on track for record growth. Home sales ended Q1 strong, with March new home sales up 20.7% over April and rising 66.8% year-over-year.

In May, pending home sales dipped 3% from April but were up 38% from last year. Median sales prices have increased 24% from last year as average homes went under contract in just 16 days and record high of 52% of homes sold for more than their list price.

 

Can this homebuying frenzy last?

Opinions vary on the sustainability of this housing market. Redfin’s chief economist says the market is not in a housing bubble, as demand is clear among qualified buyers who can afford rising prices. In contrast, John Burns Consulting notes 11 of 20 typical housing bubble signs are visible, including higher-than-normal home equity lending, historic gross margins and new urban paradigm shift.

As for the CEOs of the country’s largest banks, their takes are similarly mixed: Goldman Sachs does not see a bubble, while Citi says the situation is too soon to call. JPMorgan observes signs of a bubble but notes the financial system is better positioned with banks stocked up on loss-absorbing capital, unlike during the Great Recession.

What’s continuing to sustain a hot housing market?

Another 1.8 million homes need to be built to balance the market, according to a Jefferies analyst. The shortage poses a headwind for near-term sales as the imbalance leads to further buyer competition and price increases that evade household budgets, particularly in the West Coast region.

Notable inventory challenges stem from pandemic impacts. Many sellers have been concerned about listing homes during the health crisis. In this past April alone, reluctant homeowners staying put led to over 15,000 fewer potential sales.

Additionally, the construction industry still faces challenges following COVID-19 shutdowns and restrictions. The decline in April housing starts signals construction will struggle in coming months, with domestic lumber production unable to match the shortage. Supply constraints, combined with land and labor shortages, will limit new home construction to 1.5 million starts/year, a pace already set to rise 24.8% in 2021 over 2020 in response to demand.

Yet another big obstacle facing the industry is inflated construction costs, notably for lumber. As of early June, Madion’s Lumber Reporter saw prices of benchmark framing dimension lumber grade Western SPF KD 2x4 #2&Btr hit US$1,600/mbf, up 323% year-over-year. Southern yellow pine lumber prices tracked by Forest2Market reached US$1,062/mbf, down 8.4% from the previous week but still up 115% year-over-year.

Are homebuyers still motivated to buy?

With soaring lumber prices estimated to add US$35,872 to the average cost of a newly-built home, are potential homebuyers still eager to make that leap toward home ownership?

Those daunting numbers may be making an impression after all. A survey of homebuyer sentiment tracked by Fannie Mae has fallen to a low of 35% in May from 47% in April. On the other side of the equation, it’s a great time for selling a home, as that sentiment remained steady at 67%.

While April new home starts saw a 9.5% drop after March’s explosive growth, the 0.3% monthly gain in building permits led permit growth to outpace starts. As a result, ready-to-occupy homes have steadily fallen as a share of both new home sales and inventory. These trends create momentum for a possible rebound in months ahead given the gap between starts and permits.

Looking ahead: How will Fed action and economic reopening affect homebuying?

All eyes are on the pandemic recovery to relieve the residential sector. Recovery is set to keep a favorable market. As the vaccine rollout marches on and home prices march up, more sellers will list homes.

These factors, coupled with the trend of swift days-on-market, offer potential for higher sales when inventory matches demand. As for buyer demand, CIBC notes homebuilders anticipate activity from millennials and Gen Z, a demographic of about 150 million future buyers. Ultimately, while economists expect higher prices to moderate sales pace, demand from millennials entering prime homebuying years is set to keep sales robust.

During the pandemic, home loan applications have been driven by low interest rates. But will the Federal Reserve start hiking up interest rates to cool inflation, and thus also cool the homebuying trend?

Economic reopening poses another question for future homebuying trends. Remote work helped to fuel migration to low-cost suburban and rural areas during the pandemic. Will employees have to commute again as more offices reopen? Will homebuying shift back to urban markets with convenient commuting routes?

Grace Campbell is the Economy, Real Estate and Homebuilding editor for Industry Intelligence, which can help YOU better address your own industry challenges. To arm yourself with the latest market intelligence, contact ClientCare@IndustryIntel.com. Ask us about our interactive intelligence map and search bot on Microsoft Teams.

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