Demand Grows for New and Existing Homes

New home sales in January hit a seasonally adjusted, annual rate of 923,000, 4.3% above December’s upwardly revised sales and almost 20% above year-ago sales. All regions except the Northeast posted higher sales. Few listings in the existing home market and bidding wars are pushing buyers toward the newly built market. The supply of new homes for sale also remains tight as builders struggle to keep up with demand on top of rising lumber costs, continuing labor shortages and scarce building lots. Builders are working through backlogs to complete homes they have already sold, unseen.

Existing home sales edged up just 0.6% in January from the prior month, reaching a 6.7 million seasonally adjusted annual rate. Home sales jumped 24% compared to a year ago, marking six months in a row of double-digit annual growth. Sales were strong in the South and the Midwest while the West and Northeast lost ground. That could reverse next month when we see the effects of severe winter weather that crippled many parts of the Midwest and South earlier this month. (Keep in mind that existing sales are a lagged indicator, which is not recorded until the sale actually closes.)

The median price for existing homes hit $303,900 in January, a 14% annual increase. A significant supply crunch continues to fuel bidding wars across the country; inventory for existing homes touched another record low of only one million units, which is equal to less than a two-month supply, measured at the current pace of sales. That marked a 26% drop in inventory compared to a year ago, before the pandemic hit. As long as inventory sits below six months’ supply (historically the necessary amount for the market to clear), prices will remain elevated, even if housing demand were to cool.

Baby boomers have been aging in place and more reluctant to show their homes during the pandemic. Some of that reluctance is expected to ease as vaccines become available which, with increased construction activity, could alleviate some, but not all, of the supply shortages as we move into the second half of this year.

Mortgage rates moved up slightly, following movements by the 10-year Treasury bond rate in mid-February. According to Freddie Mac, the 30-year mortgage rate sits at 2.81% as of February 18, higher than the early January low of 2.65%. Rates are still well below levels a year ago, leaving room for many potential homeowners to take on new mortgages. The Federal Reserve has signaled that it will continue buying mortgage-backed securities for the time being, dependent upon economic recovery; this helps keep mortgage rates low even as bond yields are rising.

Mortgage applications to purchase a home fell 12% in the week ended February 19 but were still 7% higher than a year ago. The average size of a mortgage grew to a record $418,000, reflecting the surge in home prices.

Mortgages in forbearance fell for the third week in a row; 2.6 million mortgages are in forbearance, down from a peak of 4.3 million in June. Homeowners who are delinquent on their loans can delay payments, which provides much-needed relief. Renters also have some temporary protection from evictions.

Even with an eviction moratorium in place, eviction filings are still occurring. According to research by the Princeton University Eviction Lab, over a million evictions have occurred since the start of the pandemic. Additionally, landlords are not renewing rental contracts as they come due (which does not show up in the eviction numbers). Most of those evicted are Black renters (who from 2012-2016 made up 20% of the total share of renters but were 35% of the total share of those evicted). Congress approved $25 billion in rental aid to help with utilities and arrears to landlords; it does not cover all of the rent that will be due when moratoriums are lifted so we expect more support will be needed.

Bottom Line
The strong housing market illustrates how uneven the economic recovery is. We expect home prices to remain elevated even if the demand for suburban and vacation homes cools when herd immunity is reached. Given the short supply of existing homes, many potential buyers are likely to turn to builders despite rising construction costs.

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