The housing market during the pandemic has been a story of strong demand facing weak supply, resulting in outsize price increases. That storyline might be starting to change somewhat, but the markets for both new and existing homes have not quite returned to pre-pandemic conditions, as revealed in data released last week.
Demand for both new and existing homes during the pandemic was boosted by the desire for more space — often for space away from dense urban areas — while accommodative monetary policy led to historically low mortgage interest rates, improving affordability.
The purchase-only index rose 2.2% in the week ending Sept. 17, its largest jump in two months and now reaching its highest level since mid-April. The survey noted a sharp increase in Federal Housing Administration and Veterans Affairs applications, while also attributing the recent increase to very low mortgage rates. But rising home prices are tempering demand. Existing home sales fell by 2% over the month to a seasonally adjusted annual rate of 5.88 million in August, according to the National Association of Realtors.
Sales fell more in the Northeast, down 3.2%, and South, down 2.6%, while sales were flat in the West. The fall in the number of homes sold was accompanied by a 0.8% decline in the median price, as more lower-priced homes traded in the month, evidence of a shift in buyer preference toward lower home costs. On a year-over-year basis, the median home price rose by 14.9% to $356,700. Real estate agents reported fewer first-time buyers in August than the same month last year as a proportion of total sales, and more all cash sales.
Moreover, July sales were revised higher. With builders facing persistent supply-side constraints, from the high cost of materials such as lumber, steel and appliances, and shortages of labor and lots, 36% of homes sold were not yet under construction. The median price of a new home was unchanged but is 20.1% higher than a year ago.
As robust demand continues, homebuilders are optimistic about market conditions. The National Association of Home Builders' Housing Market Index increased to 76 in September from 75 in August. The index showed increased buyer traffic, one of the components that had been a drag to the index in recent months. Homebuilders are more optimistic as lumber prices ha
Despite facing continued supply-side challenges, the backlog of sales waiting for construction to begin is evidently motivating builders to ramp up work. Housing starts rose by 3.9% in August, according to the Census Bureau , far faster than expected. July starts were revised higher. The August gain was entirely in multifamily units as single-family starts, which typically account for about two-thirds of all starts, fell. Building permits rose 6.0% over the month, with demand for multifamily permits up by 15.8% to 674,000 on a seasonally adjusted basis, the highest number in 20 years. Starts rose at the fastest pace in the Northeast, which accounts for the smallest share of starts, and fell in the West.
The Fed Speaks
The highly anticipated statement released last weekby the Federal Reserve's policy committee confirmed the expectations of many Fed watchers, noting that “a moderation in the pace of asset purchases” is likely to begin this year. At his post-meeting press conference, Fed Chairman Jerome Powell suggested that all purchases could end by the middle of next year. The committee downgraded its projections of economic growth for the year in light of continued supply-chain disruptions and the spread of the cororavirus's delta variant dampening economic activity.
Nevertheless, the committee has turned slightly more hawkish than it was six weeks ago at its last meeting, with two more committee members indicating a vote to raise the policy rate in 2022, as concerns of inflation persisting for longer spread. Despite a disappointing August jobs report, Powell noted that “substantial further progress” in the labor market, a pre-condition to policy rate hikes, “is all but met,” language that seems much more optimistic than was used at his last press conference.
Labor Market Still on the Mend
Some analysts might have expected that the expiration of enhanced and extended unemployment benefits after the first week in September would lead to fewer initial claims being filed. For those, it came as a surprise that the Department of Labor reported an increase in initial claims for unemployment last week. In the week ending on Sept. 18, 306,200 claims were filed, not seasonally adjusted, compared to 265,900 the prior week. An additional 15,162 claims were filed for pandemic unemployment assistance even though that program has ended, as workers can file claims retroactively through Oct. 6. In total, initial claims remains almost 50% higher than the 2019 weekly average.
Continued claims for regular benefits also rose, from 2.4 million to 2.5 million in the week ending on Sept. 11. Roughly 11.2 million claims for continued benefits were filed the previous week under all programs, including regular state benefits, pandemic unemployment assistance, pandemic emergency unemployment compensation, and extended benefits.
The Week Ahead …
Much attention will be focused on Washington and the ability of Congress to make progress on several issues, including passing a spending bill to prevent a government shutdown on Friday and raising the U.S. national debt limit to extend Treasury’s borrowing authority, which is projected to run out sometime in mid- to late October. Failure to accomplish either of these measures would result in a severe hit to the economy, with the magnitude of impact dependent on the length of time to come to an agreement. In addition to those “must pass” measures, passage of the bipartisan infrastructure bill and the budget reconciliation bill are still being negotiated. Failure to pass these spending bills will trim current projections of economic growth in 2022 and 2023.
Economic data scheduled to be released this week includes the final estimate of second-quarter economic growth, due on Thursday, which analysts expect to be revised upward as the widespread availability of vaccines and generous fiscal stimulus unleashed spending in the spring. If a government shutdown is averted, this release should be followed on Friday by data on personal income and spending for August, both of which are expected to see healthy increases. The report would also include the most recent read on inflation as measured by the personal consumption expenditures index, which may show some moderation from the past two months.
CoStar Economy is produced weekly by Christine Cooper, managing director and chief U.S. economist, and Rafael De Anda, associate director of CoStar Market Analytics in Los Angeles.