A Mid-Year Update on the Single-Family Housing Market
Sky-rocketing home prices surprised just about everyone in the first half of 2021. Last week’s S&P Case Shiller index provides the most recent evidence, with the national index rising 14.6% year over year in April. The index measures comparable sales over the trailing three-month period to adjust for differences in the quality of homes sold in each period. The April reading marked a record high in the level of the index and a 30-year high in month-over-month growth. Apartments stand to benefit from higher home prices as many renters are being priced out of the house market and will end up renting for longer periods. While home prices have historically yielded long-run positive gains, prices can fluctuate over short periods and, apart from pricing, the housing market is throwing a barrage of mixed signals.
With prices rising, affordability is eroding for many prospective homebuyers. The most common measures of affordability compare home prices with incomes, using standard assumptions like down payments and adjusting for fluctuations in mortgage rates.
The National Association of Realtors’ affordability index, which assumes a 20% down payment, reflects the median family income relative to the qualifying income for the median priced home. The index falls as affordability erodes. The index fell to 155.8 in April from 175 in March and 171.3 in January — two figures that were propped up by stimulus payments and other fiscal support measures that were included in the income equation. The most recent reading is far from bubble territory, but also far from accommodative to buyers. For comparison, the index reached a record low of 100 in 2006 and peaked at 213 in 2013.
Home sales have been falling throughout 2021 due to limited for-sale inventory across most U.S. markets. That trend continued in May for both existing and new single-family homes, as reported by the National Association of Realtors and the U.S. Census Bureau, respectively. Low inventory levels have spurred bidding wars, one reason why home prices have recently seen outsize gains.
Yet home sales could spark up again soon. The National Association of Realtors' pending home sale index for May surprised to the upside, rising by 8% over April. Pending sales reflect contracts signed for purchase and lead sales data which are counted when sales close, by about four to six weeks. Inventory, meanwhile, could grow in the second half of the year as COVID-19 cases subside and more current homeowners begin to feel comfortable with the prospect of opening their homes to potential buyers and searching for a new residence themselves. In terms of new homes, recent construction activity has been strong, and builders have plenty of permits in hand for homes that have yet to have seen groundbreaking, as costs for construction materials, especially lumber, have skyrocketed. The recent fall in these costs should encourage builders to move forward with homebuilding amid solid demand from homebuyers.
Lastly, distressed properties could begin to enter the market in bulk if the federal foreclosure and eviction moratoriums and forbearance programs are not renewed. Freddie Mac, for example, reports that 2% of single-family mortgages, including those that are in forbearance, are in serious delinquency, meaning they are 90 days past due or in foreclosure. For reference, Freddie Mac’s delinquency rate was under 1% prior to the pandemic and peaked at 4% during the Great Recession.
Despite bidding wars and low inventories, persistently low mortgage rates remain attractive to prospective homebuyers, although fewer households are opting to apply for mortgages. The Mortgage Bankers Association’s mortgage applications for purchase index declined by 5% the week ending June 25 from the prior week, its lowest reading since May 15, 2020. The index is based on a weekly survey of mortgage bankers and counts pre-approval and rate-lock applications. The data is noisy from week to week, but the trend over the past two months is quite clearly a downward glide. Unless we see a reversal as inventories grow, this would confirm that the peak in the pandemic flurry of homebuying occurred in January of this year.
Forecasters expect mortgage rates to remain relatively steady over the next 18 months. These have reached historic lows in part due to the Federal Reserve’s purchases of assets, which include $40 billion of mortgage-backed securities each month. With housing prices continuing to climb, however, several members of the Fed’s policy-setting committee have recently suggested that these purchases ought to be tapered off earlier than initially planned, which might take some of the froth off the housing market.
The Week Ahead …
Riding a high from fireworks and Fourth of July barbecues, analysts will get only a few data points this week. The Census Bureau is scheduled to release results for May’s "Job Openings and Labor Turnover Survey," which should show an even higher number of job openings than in April as more activity returns and companies reopen, especially in service industries such as bars and restaurants, entertainment venues and travel and tourism.
How the service sector is doing overall could be revealed in the Institute for Supply Management’s services index for June, which economists expect to show continued strength, after the group's manufacturing index edged lower in that release last week. Both indices are elevated and show the economy is broadly expanding.
Finally, minutes from the Federal Reserve's Open Market Committee’s June meeting — to be released on Wednesday — will be followed closely by those looking for clues from committee members on the path forward for asset purchases, how plans for tapering these purchases are developing and how members see inflation dynamics unfolding over the rest of the year. Stay tuned.