Supply Issue Continues As Prices Rise – Real Estate Market Update
Kevin Graham6 minute-read
June 10, 2021
Summer’s here, vaccinations are on the rise and things are getting a little closer to normal. What’s not as normal are these stratospheric home prices. Supply is an issue. And odds are it’s making things difficult for your buyers. Let’s jump into it!
The Big Story
Just looking at the headline numbers, you might come to the conclusion that things are slowing down.
According to the latest report from the National Association of REALTORS®, existing home sales were down 2.7% in April. Meanwhile, the number of new construction homes sold according to the Census Bureau and the Department of Housing and Urban Development was down 5.9% over the same period.
But when you take a deeper dive into the reports, a different story is told. The demand is there. Even with the dip in April, the annual pace is projected at 5.85 million existing homes sold. Because April 2020 was in the teeth of the pandemic shutdowns, it’s more fair to look at April 2019. Back then, the pace was 5.19 million annual sales.
On the new home sales side, there were 863,000 houses sold in April. If you compare that to April 2019, the pace was only 673,000 sales. Moreover, a look at the amount supply on the market compared to the pace of homes sold, you begin to get a clearer picture of what’s happening.
For new homes, at the current pace of sales, there are 4.4 months’ worth of supply in the market. A market is considered in balance when there’s about 6 months of supply available. On the existing home sales side, this supply problem is even worse at just 2.4 months.
There’s more supply coming, but maybe not as fast as it could be. As of April, housing was being completed at an annual rate of 1.449 million, which was down 4.4% for the month. Meanwhile, housing starts were down 9.5% at 1.569 million. This is slightly faster than the pace we found ourselves on in April 2019 when there were 1.312 million completions to go with 1.235 million starts. Higher prices for materials and difficulty finding labor aren’t helping.
Low supply has meant higher prices. The median price for an existing home is now $341,600, which is up 19% on the year. While this could come down if more supply was put on the market, it’s also worth noting that prices have gotten high enough that some people think it will be cheaper to renovate, taking advantage of low interest rates to refinance.
This means even the homes that are out there are often selling quickly with multiple offer situations. This just reinforces higher prices. The median new home is cheaper than it was a couple of years ago at $372,400. However, that’s because there are more starter homes being built right now. It doesn’t mean there’s any less competition.
Bring it all together, it’s both the market with a lot of opportunity to take advantage of low rates and a difficult market with rising prices due to low inventory. Preach patience and an upbeat attitude for your clients. The journey might take a while.
News You Can Use
As always, this portion of the report is put together with assistance from Econoday.1 Let’s get into it!
Consumer Price Index (CPI)
Prices were up 0.8% overall in the month of April and have gone up 4.2% in the last year. However, of particular interest to this audience should be the fact that the index for shelter went up quite a bit with a 0.2% increase specifically in owners’ equivalent rent, which measures how much it would cost a homeowner to rent a similar space.
Housing Market Index
May numbers in this index from the National Association of Home Builders® shows that builder sentiment and may was unchanged at an extremely high 83.
The single-family sales component held steady at 88. Sales of single-family homes over the next 6 months were anticipated to be slightly better, going up a point to 81. Meanwhile, traffic of prospective buyers walking through homes was down a single point to 73.
Taking a look at regional numbers, the Northeast was down 7 points in May to 77. Meanwhile, the Midwest was down 3 points at 72. In the South, sentiment was up a couple of points to 86. Meanwhile, the West held at a red-hot 91.
New Residential Construction
We went through this at a high-level above, but let’s really break things down. Starting with completions, these came in at a seasonally adjusted annual rate of 1.449 million. This was down 4.4% on the month, but 21.7% above the same time last year. The good news is that single-family housing completions were up 0.1% at 1.045 million. Multifamily completions were 401,000.
Looking at housing starts, these were down 9.5% on the month, but it’s 67.3% above the same time a year ago. To be fair, that’s not saying much because a lot of construction came to a halt around that time because we were just beginning lockdowns. Single-family starts were down 13.4% at 1.087 million while multifamily starts were 470,000.
Finally, permits were up 0.3% at 1.76 million. Single-family permits were 3.8% below March at 1.149 million. Meanwhile, there were 559,000 multifamily permits. Admittedly, it’s a long way from permit to completed house.
Existing Home Sales
Existing home sales were down 2.7% in April to 5.85 million. Still, sales were up 33.9% since April of last year, with the proviso that not a lot of home shopping was happening. The median home price was up 4.7% for the month and $347,600, up 19.1% on the year. In terms of supply relative to the pace of sales, it went up to 2.4 months from 2.1 months.
Taking a look at regional data, only in the Midwest saw sales growth of 0.8%. All other regions saw declines between 3% – 4%.
Case-Shiller Home Price Index
Case-Shiller survey data is based on a 3-month rolling average of home prices in 20 cities across the country. On an unadjusted basis, prices were up 2.2% and 13.3% since last year. When seasonal adjustments are factored in, prices were up 1.6% on the month.
FHFA House Price Index
The FHFA House Price Index is based on aggregate home prices across eight regions. Unlike Case-Shiller, it’s not a 3-month average either. Prices are up 1.4% for the month and 13.9% on the year, the fifth straight record for the index.
Consumer confidence fell 0.5 points in May to 117.2. April numbers were also revised just over 4 points lower. One thing that was specially noted in this report is that fewer people plan to buy homes in the next 6 months. It’s worth noting that inflation expectations were also especially high in this report, so whether inflation takes place to that level could have a lot to do with it.
New Home Sales
The annual rate for new home sales was down 5.9% in April to come in at 863,000. This is still 48.3% higher than last year at this time, granted we were just entering the pandemic.
There were 316,000 new houses for sale, which represents 4.4 months’ worth of supply at the current pace of sales.
Gross Domestic Product (GDP)
In the second estimate of economic growth for the first quarter, GDP came in at 6.4% on an annual basis. Consumer spending increased by 11.3%, which made up 7.4% of GDP. Residential investment, that is the housing near and dear to so many of us, contributed 0.57% to overall economic growth.
Pending Home Sales Index
The number of homes under contract for sale in April was down 4.4% to an index level of 106.2. This number has fallen in 3 of the last 4 months. Because this is a leading indicator for existing home sales, it means that sales of preowned homes are likely to be lower in May.
If your clients are ready, we’ve had the benefit of extremely low rates recently. Depending on what the Federal Reserve does and where inflation goes from here, rates may or may not stay in this low in even the near future. If they are sitting on the fence, it doesn’t hurt to make a move right now while rates look this good.
The average rate on a 30-year fixed mortgage with 0.6 points paid and 20% down according to Freddie Mac was up 4 basis points to 2.99% last week. This has fallen from 3.18% last year.
If you’ve got clients looking for a shorter-term, the average rate with 0.6 points paid and the same down payment for a 15-year fixed mortgage was flat at 2.27%, dropping from 2.62% a year ago.
Finally, the average rate on a 5-year adjustable-rate mortgage indexed to a treasury and adjusting once per year with the same down payment and 0.2 points paid in fees was up 5 basis points to 2.64%. It’s still down from 3.1% a year ago.
Now that you have the knowledge, go forth and share with your clients and get that commission check. For more visibility into your client’s loan process, check out our Rocket Pro SM Insight portal.
1 Important Legal Notice: Econoday has attempted to verify the information contained in this calendar. However, any aspect of such information may change without notice. Econoday does not provide investment advice, and does not represent or warrant that any of the information is accurate or complete at any time. Copyright 2021 Econoday, Inc. All rights reserved.
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