Supply Constrains Sales

New home sales, measured at the contract signing, fell 6% in April; stronger March sales were revised sharply lower, to below a million units on an annualized basis. Regionally, only the West posted sales growth. Significant shortages, especially at the entry-level, and climbing prices are constraining the ability to purchase a home. The supply of new homes available for sale at 4.4 months’ worth is one-third lower than a year ago. Builders faced with labor and land shortages, added to price spikes for materials, are delaying construction and contributing to the shortages of homes available. Almost three-quarters of new homes sold in the month were either under construction or not yet started.

Existing home sales, measured at the contract closing, fell for the third month in a row in April; supply was 20.5% lower than a year ago at just over one million units. Prices surged at another record-breaking pace from a year ago, up 19.1%. The bulk of sales was concentrated at the higher end of the market: $750,000 or more. The inventory of homes for sale has plunged to 2.4 months, near a record low. Bidding wars are now common with an average of five offers for every listing.

According to S&P CoreLogic Case-Shiller National Home Price Index, prices spiked 13.2% in March compared to a year ago, the most in over 15 years. The hottest markets continue to be in the West and South where homebuyers started looking for more space when the pandemic hit. The index also tracks single-family home rental prices, which jumped 4.3% in March when more investors flooded into the market to purchase for-rent properties. One out of every seven homes sold in the first quarter went to an investor, who is more likely to pay all cash; this is crowding out first-time home buyers.

Purchase applications for mortgages fell 4% in the week ended May 14; the average purchase application size rose above $400,000 for the first time since February. That suggests that supply constraints and upward pressure in April likely persisted into May.

Prices in multifamily rental markets picked up in April, with RealPage reporting a 1.3% monthly gain in national rent prices; the largest one-month jump in ten years. Smaller cities receiving a wave of homebuyers from larger metro areas have experienced the highest growth in the rental markets, especially in the West and the South. Rents in the larger, more expensive metros such as New York and San Francisco are rising again but not yet at pre-pandemic levels.

The shelter component of the major price indices has decelerated over the last year; shelter accounts for more than a third of the consumer price index (CPI). Look for higher home prices, a firming in rents and a rebound in hotel room rates. The gains will offset some of the slowdown in inflation that occurs as bottlenecks for other big-ticket items abate.

Bottom Line
Record-low mortgage rates are not enough to overcome the supply shortfall and erosion in affordability. Look for home sales to remain constrained, competition among buyers intense and the upward pressure on inflation to compound as we move into the summer.

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