New home sales, which are recorded at the contract signing, came in at a seasonally adjusted annual rate of 775,000 in February, a drop of 18.2% from January’s upwardly revised data. New sales came in below expectations but were still 8.2% above year-ago levels. The monthly drop in sales was broad-based as all regions saw double-digit declines with severe winter weather across much of the South and Midwest. Weather effects are temporary, but rising mortgage rates and rising materials costs could push more first-time buyers out of the market.
Existing home sales fell 6.6% in February, as the supply of existing housing stock continued to remain at record low levels (just over a million units). There are now more real estate agents than actual homes available for sale in the U.S. Existing home sales are recorded at the contract closing, so the drop is a reflection of the diminishing supply back in December and January. Electricity outages in Texas and bursting pipes across much of the South also likely delayed closings. Existing home sales were 9.1% higher than a year ago in February and currently sitting at levels last seen in 2006 at the peak of the housing boom.
Mortgage rates moved up from record lows to 3.1% in mid-March according to Freddie Mac. That is causing a pullback in refinancing activity but mortgage applications to purchase a home are still 5% above year-ago levels. Many buyers who have been looking for new homes but losing bidding wars are still in the market for now. Rates are near year-ago levels but prices have risen by a double-digit rate in many markets. Affordability is a concern as we enter the traditional home-buying season.
Median prices of homes have been rising since the pandemic began; this is due to a combination of bidding wars over a small supply and the fact that more of the sales are occurring at the higher end of the market. Sales of homes $1 million or more are up 81% on the year while homes under $250,000 are lower. Look for some transitioning out of vacation homes toward luxury travel as vaccinations pick up and more of the economy opens over the summer.
Existing homeowners were well situated to handle the COVID recession as home equity hit a $1.5 trillion level by the end of 2020. Additionally, builders are reporting that the sale of second or vacation homes make up 15% of new homes being built; the figure hovers around 5% typically. The biggest hurdle is international travel, which is harder because of a botched roll out of vaccines. This could push up rental rates in popular domestic resort areas as well. The K-shaped recovery continues.
Builders are keeping busy even though significant shortages of materials and labor are hampering their ability to meet demand. Significant supply chain delays, for everything from raw materials to appliances, add to the costs and time it takes to complete a home. Lumber and other material prices are expected to remain high into the fall.
With vaccination timelines shortening and herd immunity appearing to be in reach, many homeowners who pulled back from selling their homes during the pandemic may release much-needed supply onto the market in time for the spring/summer buying season. Sellers are often buyers, too. Their reentry into the housing market, coupled with demand from first-time home buyers, will keep demand strong for the year. The question is whether more affordable supply will be available for millennials who are entering their prime home-buying years. Mortgage rate movements will start to price out some price-sensitive buyers while soaring materials costs for builders are hindering their ability to meet demand quickly and pass on costs to buyers.
Copyright © 2021 Diane Swonk – All rights reserved. The information provided herein is believed to be obtained from sources deemed to be accurate, timely and reliable. However, no assurance is given in that respect. The reader should not rely on this information in making economic, financial, investment or any other decisions. This communication does not constitute an offer or solicitation, or solicitation of any offer to buy or sell any security, investment or other product. Likewise, this communication serves to provide certain opinions on current market conditions, economic policy or trends and is not a recommendation to engage in, or refrain from engaging, in a particular course of action.