Saturday, August 22, 2020

Why the Housing Boom...?


The Mortgage Corner

Calculated Risk

Total existing-home sales,, completed transactions that include single-family homes, townhomes, condominiums and co-ops, are booming.  They jumped 24.7 percent from June to a seasonally-adjusted annual rate of 5.86 million in July. The previous record monthly increase in sales was 20.7 percent in June of this year. Sales as a whole rose year-over-year, up 8.7 percent from a year ago (5.39 million in July 2019).

And residential construction is almost up to the February high that had been nursed by the Fed’s push for record low interest rates that have boosted purchase and refinance mortgage applications to record volumes as well.

Why the housing boom in the middle of a worldwide pandemic that is killing millions?

Interest rates are at record lows, for one thing. And the recession is probably over for a certain segment of our populace. The numbers also show there is also a tremendous pent up demand from the missing spring months due to the pandemic shutdown that normally boosts housing sales.

The conforming 30-year fixed rate is now below 3.0 percent for a one point origination fee, and jumbo conforming is just 1/8th percent higher! In fact, the best lenders are offering 2.75 percent at zero points for the 30-year conforming fixed rate.

“The housing market is well past the recovery phase and is now booming with higher home sales compared to the pre-pandemic days,” said Lawrence Yun, NAR’s chief economist. “With the sizable shift in remote work, current homeowners are looking for larger homes and this will lead to a secondary level of demand even into 2021.”

Reuters news reports housing starts (i.e., new construction) jumped 23 percent last month versus their forecast of a 3 percent gain, with single-family starts up 8 percent from an upward-revised June level and the more volatile multi-family sector spiking 58 percent. (This had to be because of rising rents and rising demand due to the housing shortage,)

However, overall starts remain 4.5 percent below their February level, with single-family starts down 9 percent since then and multi-family starts up 4 percent.  Single-family permits are up 17 percent and multi-family permits up 22 percent, a very strong sign of future construction activity.  It brought the level of single-family permits to within 1 percent of the February total, while multi-family permits, which bounce around a lot, are up sharply from February.

Construction will have to pick up even more with housing inventories at record lows. Total housing inventory at the end of July totaled 1.50 million units, down from both 2.6 percent in June and 21.1 percent from one year ago (1.90 million). Unsold inventory sits at a 3.1-month supply at the current sales pace, down from 3.9 months in June and down from the 4.2-month figure recorded in July 2019; which is way below the more normal 5-6 month supply.

“Housing has clearly been a bright spot during the pandemic and the sharp rebound in builder confidence over the summer has led NAHB to upgrade its forecast for single-family starts, which are now projected to show only a slight decline for 2020,” said NAHB Chief Economist Robert Dietz. “Single-family construction is benefiting from low interest rates and a noticeable suburban shift in housing demand to suburbs, exurbs and rural markets as renters and buyers seek out more affordable, lower density markets.”

The median existing-home price for all housing types in July was $304,100, up 8.5 percent from July 2019 ($280,400), as prices rose in every region. July’s national price increase marks 101 straight months of year-over-year gains. For the first time ever, national median home prices breached the $300,000 level.

This verifies what we are seeing in the financial markets. The recession seems to be over for the top 10 percent of income earners. Many of them have gone back to work, or have white collar jobs and work from home, or don’t have to work because they are so-called ‘rentiers’ that live off their soaring asset values, as seen in the record rise in the S&P 500 index.

What happens next with the inevitable surge in COVID-19 cases this fall, school openings and the ordinary flu season, as I’ve said? Probably not much to the DOW and bonds, or even housing, when all this is over.

However, the rest of the economy not driven by the top 10 percent of income owners, such as actual consumer spending on staples and durable goods, is another story. Nor will corporations see the need to ‘pay it forward’ for future generations, unless we can find a better way to create living wages for the other 90 percent of adult-age workers; most of them still unemployed.

Harlan Green © 2020

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